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What changed in GPGI, Inc.'s 10-K — 2022 vs 2023

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Paragraph-level year-over-year comparison of GPGI, Inc.'s 2022 and 2023 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2023 report.

+350 added−314 removedSource: 10-K (2024-03-12) vs 10-K (2023-03-10)

Top changes in GPGI, Inc.'s 2023 10-K

350 paragraphs added · 314 removed · 251 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

89 edited+23 added−7 removed107 unchanged
Biggest changeBased on industry reports: • Identity fraud losses totaled $52 billion in 2021, including fraud scams to obtain personal information from consumers, affecting 42 million U.S. adults. • Over 422 million people were victims of data breaches in 2022; representing about a 42% increase over 2021 data. • Payment card fraud losses worldwide exceeded $32 billion in 2021, of which nearly $12 billion was in the U.S. • Passwords are often identified as the weak link in cybersecurity, with password security issues accounting for 80% of all data breaches globally in 2022. • Most consumers are ready to transition away from password login methods and consider secure access to be highly influential in trusting their financial services providers.
Biggest changeBased on industry reports: • Identity fraud losses totaled $43 billion in 2022, including fraud scams to obtain personal information from consumers, affecting 40 million U.S. adults, as reported by Javelin Strategy & Research. • According to the Identity Theft Resource Center's 2023 Annual Data Breach Report, in 2023, there were 3,205 publicly reported data compromises which impacted an estimated 353 million individuals, representing a 78% increase over the prior year. • Payment card fraud losses worldwide exceeded $34 billion in 2022, which is a 5% increase over the prior year, per WalletHub.com's industry blog. • Passwords are often identified as the weak link in cybersecurity, with password security issues accounting for 80% of all data breaches globally in 2022, according to Locker.io's industry blog. • PMNTS.com, an industry journal, has reported that 68% of consumers want to keep passwords off their mobile app login experience. • Average call center load related to passwords is 30-50% of total volume, as estimated by SOTI.net's industry blog. • According to the National Consumer Law Center, the U.S.
The Company’s values are embodied in the following key concepts: Key Product Overview The Company led the creation and growth of the metal card form factor through its expertise in material science and has been at the forefront of emerging embedded payment technology (e.g., the evolution of “ tap to transact ”).
The Company’s values are embodied in the following key concepts: Key Product Overview The Company led the creation and growth of the metal card form factor through its expertise in material science and has been at the forefront of emerging embedded payment card technology (e.g., the evolution of “ tap to transact ”).
As the cardholder must physically possess the card to have all the necessary information to make a purchase, this technology aims to fight the $32 billion payment card fraud crisis facing the credit card industry. • LED – This feature can be added to the Company’s Metal Veneer cards, enabling the issuing bank logo (or other elements) on the face of the card to light up with LEDs when a contactless transaction is initiated at the point of sale.
As the cardholder must physically possess the card to have all the necessary information to make a purchase, this technology aims to fight the $32 billion payment card fraud crisis facing the credit card industry. 9 • LED – This feature can be added to the Company’s Metal Veneer cards, enabling the issuing bank logo (or other elements) on the face of the card to light up with LEDs when a contactless transaction is initiated at the point of sale.
The Company expects to continue to develop innovations for payment card form factor design, components and manufacturing methods, many of which are reflected in patent applications, which may also include further technological innovations for the Arculus Platform. Clients The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers.
The Company expects to continue to develop innovations for payment card form factor design, components and manufacturing methods, many of which are reflected in patent applications, which may also include further technological innovations for the Arculus platform. Clients 12 The Company maintains trusted, highly-embedded and long-term customer relationships with an expanding set of global issuers.
The Company has key US and international patents and trade secrets in many facets of metal card form factors and manufacturing processes, including the integration of NFC technology into metal payment cards. 8 The Company provides its clients customized and highly differentiated financial payment products in order to support and grow the acquisition, retention, and spending of cardholders.
The Company has key US and international patents and trade secrets in many facets of metal card form factors and manufacturing processes, including the integration of NFC technology into metal payment cards. The Company provides its clients customized and highly differentiated financial payment products in order to support and grow the acquisition, retention, and spending of cardholders.
The Company may terminate the Amex Agreement if American Express does not make required payments, and does not remedy the non-payment within a prescribed time period. In addition, subject to compliance by American Express with any existing purchase commitments, American Express may terminate individual orders entered into under the Amex Agreement with prior written notice.
The Company may terminate the Amex Agreement if American Express does not make required payments, and does not remedy the non-payment within a prescribed time period. In addition, subject to compliance by American Express with any 13 existing purchase commitments, American Express may terminate individual orders entered into under the Amex Agreement with prior written notice.
Hot storage wallets and related solutions include wallets typically provided by digital asset exchanges to their customers and the related backend software solutions enabling hot storage wallets. 15 Manufacturing The Company designs and manufactures its metal payment cards using highly specialized equipment, significantly modified to meet the Company’s particular production methods and card constructions.
Hot storage wallets and related solutions include wallets typically provided by digital asset exchanges to their customers and the related backend software solutions enabling hot storage wallets. Manufacturing The Company designs and manufactures its metal payment cards using highly specialized equipment, significantly modified to meet the Company’s particular production methods and card constructions.
The Company believes these targeted sales and marketing activities will drive the Arculus portfolio of solutions to consumers through a variety of channels, while also diversifying the Arculus revenue streams into a combination of hardware sales and recurring revenues from transaction processing fees and subscription fees. Business-to-Consumer Sales .
The Company believes these targeted sales and marketing activities will drive the Arculus portfolio of solutions to consumers through a variety of channels, while also diversifying the Arculus revenue streams into a combination of hardware sales and recurring revenues from transaction processing fees, subscription fees and licensing fees. Business-to-Consumer Sales .
Arculus Business Solutions : The Company's Arculus technology is designed to transform a metal payment card into a multifunctional device to support both traditional payments and to act as a ‘ tap-to-authenticate ’ hardware 9 token allowing for passwordless and hardware-based multi-factor authentication.
Arculus Business Solutions : The Company's Arculus technology is designed to transform a metal payment card into a multifunctional device to support both traditional payments and to act as a ‘ tap-to-authenticate ’ hardware token allowing for passwordless and hardware-based multi-factor authentication.
The Company is required to submit to periodic audits, self- assessments, or other assessments of its compliance with the payment card industry security standards. The Company has maintained payment network certifications for many years and believes that it can continue to renew such certifications.
The Company is required to submit to periodic audits, self-assessments, or other assessments of its compliance with the payment card industry security standards. The Company has maintained payment network certifications for many years and 17 believes that it can continue to renew such certifications.
In order to determine whether a particular digital asset is a security prior to supporting purchase and swap transactions on the Arculus Cold Storage Wallet in such digital asset, the Company relies upon legal and regulatory analysis of legal counsel with expertise in the digital asset industry.
In order to determine whether a particular digital asset is a security prior to supporting purchase and swap transactions on the Arculus Cold Storage Wallet in such digital asset, 18 the Company relies upon legal and regulatory analysis of legal counsel with expertise in the digital asset industry.
The Company provides a physical, branded touchpoint through the sleek metal card that the Company believes will be preferred by financial institutions and other branded stakeholders in the market for digital assets over less tangible, digital-only hot storage Wallets.
The Company 15 provides a physical, branded touchpoint through the sleek metal card that the Company believes will be preferred by financial institutions and other branded stakeholders in the market for digital assets over less tangible, digital-only hot storage Wallets.
In some cases, existing laws have been interpreted to apply to digital assets, 18 while in other cases, jurisdictions have adopted laws, regulations or directives that specifically affect digital assets, and some jurisdictions have not taken any regulatory stance on digital assets and or have expressly declined to apply regulation.
In some cases, existing laws have been interpreted to apply to digital assets, while in other cases, jurisdictions have adopted laws, regulations or directives that specifically affect digital assets, and some jurisdictions have not taken any regulatory stance on digital assets and or have expressly declined to apply regulation.
Sustainability & Environmental Protection The Company has been proactively pursuing environmentally friendly products for over 20 years and in 2022 achieved carbon neutral operations through a combination of production efficiencies and purchasing carbon offsets.
Sustainability & Environmental Protection The Company has been proactively pursuing environmentally friendly products for over 20 years and achieved carbon neutral operations in 2022 and 2023 through a combination of production efficiencies and purchasing carbon offsets.
The distinct value proposition of the Company’s products has resulted in widespread adoption by major banks, financial institutions and leading fintech innovators to support their acquisition and retention of consumer and business card customers.
The distinct value proposition of the Company’s products has resulted in widespread adoption by major banks, financial institutions and fintech innovators to support their acquisition and retention of consumer and business card customers.
However, most of the Company’s 14 competitors in card manufacturing are large, diversified businesses with areas of strategic focus outside of the payment cards market, and their card operations focus primarily on lower margin plastic card manufacturing.
However, most of the Company’s competitors in card manufacturing are large, diversified businesses with areas of strategic focus outside of the payment cards market, and their card operations focus primarily on lower margin plastic card manufacturing.
Issuers use advertising and program benefits to attract cardholders and 5 also use brand recognition that relies upon the physical attributes of the payment card itself, including the look, feel and composition of the physical cards.
Issuers use advertising and program benefits to attract cardholders and also use brand recognition that relies upon the physical attributes of the payment card itself, including the look, feel and composition of the physical cards.
The Company has continued to grow its team of international direct sales representatives and third-party distribution partners to further support growth in markets outside of the U.S. Fintech Issuers . Innovative new issuers, including digital challenger banks and other emerging fintechs, are increasingly seeking premium physical touch points to enhance their otherwise digital-only customer relationships.
The Company has continued to grow its team of international direct sales representatives and third-party distribution partners to further support growth in markets outside of the U.S. Fintech Issuers . Innovative new issuers, including digital challenger banks and other emerging fintechs, are increasingly seeking premium physical touch points to enhance their typically digital-only customer relationships.
The Company has direct sales representatives in the U.S., Europe, India and South America, supported by client relationship managers and solutions architects. The Company establishes direct engagement between its sales team and issuers in various regions across the world, with success driven by an iterative and collaborative process. The Company’s sales team focuses on issuer portfolios on a program-by-program basis.
The Company has direct sales representatives in the U.S., Europe, Asia and South America, supported by client relationship managers and solutions architects. The Company establishes direct engagement between its sales team and issuers in various regions across the world, with success driven by an iterative and collaborative process. The Company’s sales team focuses on issuer portfolios on a program-by-program basis.
The Company has been a leader and innovator for decades in the payment cards industry, including the first metal payment card (2003), the first mass affluent metal payment card (2010), the first metal “ tap-to-pay ” credit card (2016), the first metal NFC-enabled cold storage hardware device (2021), and a pipeline of new product features including LED display features, biometric security features, glass and mirror-finish payment card constructions, dynamic CVV, and product and solution expansion planned for the Arculus Platform.
The Company has been a leader and innovator for decades in the payment cards industry, including the first metal payment card (2003), the first mass affluent metal payment card (2010), the first metal “ tap-to-pay ” credit card (2016), the first metal NFC-enabled cold storage hardware device (2021), the first metal NFC-enabled hardware authentication token (2022), and a pipeline of new product features including LED display features, biometric security features, glass and mirror-finish payment card constructions, dynamic CVV, and product and solution expansion planned for the Arculus platform.
Metal payment cards were initially designed and marketed to payment card issuers targeting relatively small segments of high-net-worth cardholders. Market acceptance within the high-net-worth segment has led issuers to expand their metal payment card offerings to target mass affluent and other customer segments. Issuance of Metal payment cards is growing quickly but remains in early phases of adoption globally.
Metal payment cards were initially designed and marketed to payment card issuers targeting relatively small segments of high-net-worth cardholders. Market acceptance within the high-net-worth segment has led issuers to expand their metal payment card offerings to target mass affluent and other customer segments. Issuance of Metal payment cards has grown quickly but remains in early phases of adoption globally.
The Company's Arculus secure authentication technology is expected to address the growing need for more secure, but frictionless solutions - for payment card issuers and other businesses seeking to improve their consumer experience. Growth Opportunities The Company is a high-growth, profitable technology company, focused on innovative payments, security, and authentication solutions.
The Company's Arculus secure authentication solutions are expected to address the growing need for more secure, but frictionless solutions - for payment card issuers, financial institutions and other businesses seeking to improve their consumer experience. Growth Opportunities The Company is a high-growth, profitable technology company, focused on innovative payments, security, and authentication solutions.
It has been reported that dual-interface cards were used in 14% of in-store payments in 2022, twice as much as in 2021. Even with the ongoing global expansion of e-commerce, the need for physical card products is not expected to significantly diminish.
It has been reported that contactless cards were used in 14% of in-store payments in 2022, twice as much as in 2021. Even with the ongoing global expansion of e-commerce, the need for physical card products is not expected to significantly diminish.
The Arculus Cold Storage Solution can integrate directly into existing card issuer infrastructures. Arculus technology is built to fit with and promote client branding.
The Arculus Cold Storage solutions can integrate directly into existing card issuer infrastructures. Arculus technology is built to fit with and promote client branding.
Since its founding, the Company’s growth has been underpinned by the transformative security and payments technologies it has developed and commercialized for large, mainstream markets.
Since its founding, the Company’s growth has been driven by the transformative security and payments technologies it has developed and commercialized for large, mainstream markets.
The Company’s innovative metal payment card technology and Arculus security and authentication capabilities deliver unique, premium branded experiences, enable people to access and use their assets, and ensure trust at the point of a transaction.
The Company’s innovative metal payment card technology and Arculus security and authentication capabilities deliver unique, premium branded experiences, enable people to access and use their assets, protect their digital identities and ensure trust at the point of a transaction.
Research and Development & Intellectual Property The Company’s Innovation Lab is comprised of material scientists, engineers and technicians devoted to the invention and development of new metal form factors, card features, secure authentication and digital asset storage technology and applications.
Research and Development & Intellectual Property The Company’s research and development team is comprised of material scientists, engineers and technicians devoted to the invention and development of new metal form factors, card features, secure authentication and digital asset storage technology and applications.
To the Company’s knowledge, the following features of the Arculus Cold Storage Wallet are unique in the industry as such features are not currently available in the wallet offerings of the Company’s primary competitors: • Cold Storage : Private keys remain in an offline environment kept in a metal card using a CC EAL 6 secure element (which refers to Common Criteria Evaluation Assurance Level 6, an international standard established by www.commoncriteriaportal.org, which is used to evaluate the security implementation in information technology software and hardware). • Three-Factor Authentication : Advanced security across: (1) biometric (i.e., fingerprint and/or facial recognition); (2) personal identification number (PIN); and (3) NFC connection with the Arculus card. • Innovative Form Factor : Digital asset key storage solution contained in a slim, metal form factor card, which does not require a battery or charging, offering a premium user experience and heightened hardware protection through an easy-to-use, NFC connection (“ tap-to-transact ”). • Fully Featured Mobile A pplication: Easily send, receive, purchase and swap digital assets. 11 The Company has arrangements in place with third party liquidity partners to provide Arculus customers with digital asset purchase and/or swap transactions.
To the Company’s knowledge, the following features of the Arculus Cold Storage Wallet are unique in the industry as such features are not currently available in the wallet offerings of the Company’s primary competitors: • Cold Storage : Private keys remain in an offline environment kept in a metal card using a CC EAL 6 secure element (which refers to Common Criteria Evaluation Assurance Level 6, an international standard established by www.commoncriteriaportal.org, which is used to evaluate the security implementation in information technology software and hardware). • Three-Factor Authentication : Advanced security across: (1) biometric (i.e., fingerprint and/or facial recognition); (2) personal identification number (PIN); and (3) NFC connection with the Arculus card. 11 • Innovative Form Factor : Digital asset key storage solution contained in a slim, metal card form factor, which does not require a battery or charging, offering a premium user experience and heightened hardware protection through an easy-to-use, NFC connection (“ tap-to-transact ”). • Fully Featured Mobile Application : Easily send, receive, purchase and swap digital assets.
With an estimated 2022 global addressable market of 4.5 billion payment cards issued, the Company’s total penetration is estimated to be less than 0.7%. The Company believes the payment card market is undergoing a long-term transformation from plastic to metal card form factors.
With an estimated 2023 global addressable market of 4.8 billion payment cards issued, the Company’s total penetration is estimated to be less than 0.7%. The Company believes the payment card market is undergoing a long-term transformation from plastic to metal card form factors.
The Company has also steadily grown the number of customers it serves, increasing from approximately 30 in 2016 to more than 125 in 2022. Scale . In 2022, the Company produced approximately 30 million metal payment cards.
The Company has also steadily grown the number of customers it serves, increasing from approximately 30 in 2016 to more than 125 in 2023. Scale . In 2023, the Company produced approximately 31 million metal payment cards.
The Arculus Cold Storage Solution works across exchanges, marketplaces, and platforms to bring convenience into the world of self-custody — allowing consumers to simply and securely access their digital assets. As digital assets try to establish their value in the world, card issuers offering metal payment cards featuring cold storage capabilities signal a future-forward mindset to their customers.
The Arculus Cold Storage solutions work across exchanges, marketplaces, and platforms to bring convenience into the world of self-custody — allowing consumers to simply and securely access their digital assets. As digital assets try to establish their value in the world, card issuers offering metal payment cards featuring Arculus Cold Storage signal a future-forward mindset to their customers.
The Company has been serving its two largest clients, American Express and JP Morgan Chase, for over fifteen years, building strong relationships with key personnel. For these major and numerous other clients, the Company has produced metal payment cards for over 125 card programs, including issuer proprietary and co-branded programs.
The Company has been serving its two largest clients, American Express and JP Morgan Chase, for nearly sixteen years, building strong relationships with key personnel. For these major and numerous other clients, the Company has produced metal payment cards for over 150 card programs, including issuer proprietary and co-branded programs.
The Company’s primary Arculus Business Solutions are: • Payments + Arculus Secure Authentication – The Arculus Secure Authentication Solutions are expected to be seamlessly integrated and paired with the Company’s payment cards, allowing consumers to make transactions and gain secure access to personal accounts, all from the same metal card.
The Company’s primary Arculus Business Solutions are: • Payments + Arculus Authenticate – The Arculus Authenticate solutions can be seamlessly integrated and paired with the Company’s payment cards, allowing consumers to make secure transactions and gain secure access to personal accounts, all from the same metal card.
The Company’s 40 distinct utility patent families have an average remaining lifetime of over 13 years (of their 20-year terms from filing date, assuming eventual grant and all annuities paid); its 8 design patent families have an average 84% of their remaining lifetime remaining (of 10 – 25-year terms, depending upon jurisdiction), and its registered trademarks/service marks have ten-year terms renewable indefinitely with ongoing use.
The Company’s 39 distinct utility patent families have an average remaining lifetime of over 12 years (of their 20-year terms from filing date, assuming eventual grant and all annuities paid); its 8 design patent families have an average 79% of their remaining lifetime remaining (of 10 – 25-year terms, depending upon jurisdiction), and its registered trademarks/service marks have ten-year terms renewable indefinitely with ongoing use.
The Company’s master service agreement and related statement of work with JP Morgan Chase (the “Chase Agreement”) will be up for renewal on December 31, 2023. Typically, the Company renews such client agreements 13 upon their expiration in the ordinary course of business.
The Company’s master service agreement and related statement of work with JP Morgan Chase (the “Chase Agreement”) was extended during 2023, and will be up for renewal on December 31, 2028. Typically, the Company renews such client agreements upon their expiration in the ordinary course of business.
Supply Chain The Company has developed and maintains a valuable and extensive network of suppliers, which provide the Company with EMV chips, various types of metal, adhesives, signature panels, magnetic stripes, payment 16 network logos (including holographic) and other materials for payment card production.
Personalization partners provide cardholder personalization and fulfillment services. 16 Supply Chain The Company has developed and maintains a valuable and extensive network of suppliers, which provide the Company with EMV chips, various types of metal, adhesives, signature panels, magnetic stripes, payment network logos (including holographic) and other materials for payment card production.
The Company’s metal card products compete with other card manufacturers, including Idemia France S.A.S., Thales DIS France SA, CPI Card Group, Giesecke & Devrient GmbH, Kona I and BioSmart Co., Ltd.
The Company’s metal card products compete with other card manufacturers, including Idemia France S.A.S., Thales DIS France SA, CPI Card Group, Giesecke & Devrient GmbH, Federal Card Systems, Kona I, BioSmart Co., Ltd., and ICK International.
From white-labeled mobile applications to custom metal cards, Arculus provides secure solutions that amplify client brands into their consumer's everyday wallets. • Payments + Arculus Secure Authentication + Arculus Cold Storage – The Company also expects to be able to combine its Arculus Secure Authentication Solution and Arculus Cold Storage Solution to enable card issuers and other businesses to build multi-factor authentication solutions for their customers and offer consumers the ability to make transactions and store the private keys to their digital assets – all on the same metal card.
From white-labeled mobile applications to custom metal cards, Arculus provides secure solutions that amplify client brands into their consumer's everyday wallets. • Payments + Arculus Authenticate + Arculus Cold Storage – The Company also offers combined its Arculus Authenticate solutions and Arculus Cold Storage solutions to enable card issuers and other businesses to build multi-factor authentication solutions for their customers and offer consumers the ability to make transactions and store the private keys to their digital assets – all on the same metal cards.
This custom security solution enables card issuers and other businesses to build multi-factor authentication solutions for their customers, through the convenience of the Company’s premium metal cards — “Powered by Arculus.” The Arculus customizable secure authentication feature is designed to fit into each client’s own information technology infrastructure with ease, enabling them to meet the specific needs of their customers.
This custom security solution enables card issuers and other businesses to build multi-factor authentication solutions for their customers, through the convenience of the Company’s premium metal cards — Powered by Arculus . Arculus Authenticate is a customizable feature designed to fit into each client’s information technology infrastructure with ease, enabling them to meet the specific needs of their customers.
The Company expects to maintain its technological advantages over competitors with consistent research and development investment in its Innovation Lab to drive new metal form factors and card features, including the Arculus portfolio of secure authentication and digital asset storage solutions, which provide opportunities for expanded revenue and profitability.
The Company expects to maintain its technological advantages over competitors with consistent research and development activities to drive new and innovative metal form factors and card features, including the Arculus portfolio of secure authentication and digital asset storage solutions, which provide opportunities for expanded revenue and profitability.
The work of the Innovation Lab is then made available by the Company’s sales team to its existing and new customers, and rapidly deployed into the Company’s manufacturing operations for production of customer orders.
The work of the research and development team is then made available by the Company’s sales team to its existing and new customers, and rapidly deployed into the Company’s manufacturing operations for production of customer orders.
The Company’s primary metal form factors include: Embedded Metal Metal Veneer Lite Metal Veneer Full Metal Metal core with polymer front and back faces Metal front with polymer back Metal front with polymer back Greatest metal density and weight Features dual-interface technology Features dual-interface technology Features dual-interface technology Features dual-interface technology Flexible design options Weighs approximately 13 grams Can be engraved Supports 2D/3D engraved graphics Weighs approximately 12 grams Weighs approximately 16 grams Weighs approximately 21-28 grams The Company has also recently introduced the following innovative metal card form factors to respond to the needs of payment card issuers to increasingly seek to differentiate their brands to business and consumer customers: Lux Glass TM Echo Mirror TM Ceramic Metal Hybrid Uses of Corning® Gorilla® Glass with metal bezel Buffed stainless-steel Metal front with polymer back Durable for heavy use Mirror-like finish and scratch-resistant coating Black or white ceramic coating Elegant look and feel with metal sound Supports laser/mechanical engraving Supports laser/mechanical engraving Weighs approximately 8 grams Weighs approximately 20 grams Weighs approximately 20 grams In addition, as payment card issuers face growing demand for enhanced security and other distinctive features for their card programs, the Company’s Innovation Lab has recently provided its customers the opportunity to include any of the following new and innovative features in their payment cards: • Biometric cards - This feature adds on-card biometric sensors for added security.
The Company’s primary metal form factors include: Embedded Metal Metal Veneer Lite Metal Veneer Full Metal Metal core with polymer front and back faces Metal front with polymer back Metal front with polymer back Greatest metal density and weight Features dual-interface technology Features dual-interface technology Features dual-interface technology Features dual-interface technology Flexible design options Weighs approximately 13 grams Can be engraved Supports 2D/3D engraved graphics Weighs approximately 12 grams Weighs approximately 16 grams Weighs approximately 21-28 grams Lux Glass TM Echo Mirror TM Ceramic Metal Hybrid Uses of Corning® Gorilla® Glass with metal bezel Buffed stainless-steel Metal front with polymer back Durable for heavy use Mirror-like finish and scratch-resistant coating Black or white ceramic coating Elegant look and feel with metal sound Supports laser/mechanical engraving Supports laser/mechanical engraving Weighs approximately 8 grams Weighs approximately 20 grams Weighs approximately 20 grams In addition, as payment card issuers face growing demand for enhanced security and other distinctive features for their card programs, the Company in 2022 began offering its customers the opportunity to include the following new and innovative features in their payment cards: • Biometric cards - This feature adds on-card biometric sensors for added security.
For example, the Company offers a partner-branded (or “white-labeled”) version of the Arculus Secure Authentication Solution and the Arculus Cold Storage Wallet, as well as other Arculus products and/or services. The Company believes this model solves the client’s need to provide their consumers enhanced security.
For example, the Company offers a partner-branded (or “white-labeled”) version of the Arculus Authenticate and the Arculus Cold Storage solutions, as well as other Arculus products and/or services. The Company believes this model solves the client’s need to provide their consumers enhanced security.
The Company uses high-security ground freight (such as armored vehicles) for delivery of finished payment cards to the Company’s clients or, more frequently, directly to personalization partners selected by the Company’s clients. Personalization partners provide cardholder personalization and fulfillment services.
The Company uses high-security ground freight (such as armored vehicles) for delivery of finished payment cards to the Company’s clients or, more frequently, directly to personalization partners selected by the Company’s clients.
The Company’s direct-to-consumer strategy expects to generate sales via the Internet, physical retail and other channels. The Company’s online direct-to-consumer strategy includes selling products through its own Arculus-branded e-commerce website, as well as other Internet distribution channels, including Amazon.com ® , Walmart.com ® , NewEgg.com ® , and other online distributors. Competition The market for payment cards is highly competitive.
The Company’s online direct-to-consumer strategy includes selling products through its own Arculus-branded e-commerce website, as well as other Internet distribution channels, including Amazon.com ® , Walmart.com ® , NewEgg.com ® , and other online distributors. 14 Competition The market for payment cards is highly competitive.
In 2022, the Company produced metal payment cards for 8 of the top 10 U.S. card issuers. The Company believes there are substantial opportunities to expand adoption of metal form factors for 7 existing client proprietary and co-branded mass affluent card programs which do not currently offer metal payment cards.
The Company believes there are substantial opportunities to expand adoption of metal form factors for existing client proprietary and co-branded mass affluent card programs in the U.S. which do not currently offer metal payment cards.
For example, the Company supports the following proprietary and co-branded programs: Issuer/Reseller JPMorgan Chase American Express Capital One Fiserv Proprietary Programs Sapphire Preferred® Centurion® Venture® N/A Sapphire Reserve® Platinum® Savor® JPM Reserve® Gold® Spark Business® Ink® VentureX® Co-Branded Programs Amazon Prime® Amazon Prime Business® N/A Verizon® Whole Foods® Marriott® Morgan Stanley® United® Delta® X1 TM Marriott® Air Canada Hyatt Business® Disney® These card portfolios create recurring revenue streams driven by issuer demand for the Company's metal payment cards to support new customer acquisition and replacement card activity for lost and stolen cards, account fraud, and natural card reissuance cycles that occur each year.
For example, the Company supports the following proprietary and co-branded programs: Issuer/Reseller JPMorgan Chase American Express Proprietary Programs Sapphire Preferred® Centurion® Sapphire Reserve® Platinum® JPM Reserve® Gold® Ink® Co-Branded Programs Amazon Prime® Amazon Prime Business® Whole Foods® Marriott® United® Delta® Marriott® Air Canada Hyatt Business® Disney® These card portfolios create recurring revenue streams driven by issuer demand for the Company's metal payment cards to support new customer acquisition and replacement card activity for lost and stolen cards, account fraud, and natural card reissuance cycles that occur each year.
Market Opportunity Edgar, Dunn and Company, a global financial services and payments consulting firm (“Edgar Dunn”), estimated there were 9 billion addressable payment cards in circulation (from total of over 15 billion) globally in 2022, with 4.5 billion addressable payment cards issued in 2022, and estimates total cards issued will grow to 5.5 billion by 2025.
Market Opportunity Edgar, Dunn and Company, a global financial services and payments consulting firm (“Edgar Dunn”), estimated there were 9.6 billion addressable payment cards in circulation (from total of over 16 billion) globally in 2023, with 4.8 billion addressable payment cards issued in 2023, and estimates total cards issued will grow to 5.8 billion by 2026.
In addition, Arculus customers can effect peer-to-peer/send & receive transfers using the Arculus Cold Storage Wallet and three-factor authentication technology, providing the end user significantly more protection against theft, fraud and hacking as compared to the use of custodial hot storage. The Company is not compensated for such user-directed activities.
In addition, Arculus customers can effect peer-to-peer/send & receive transfers using the Arculus Cold Storage Wallet and three-factor authentication technology, providing the end user significantly more protection against theft, fraud and hacking as compared to the use of custodial hot storage.
It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, interpretations, policies, rules or guidance directly or indirectly affecting a digital asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use digital assets, or to exchange digital assets for either fiat currency or other virtual currency. 19 As digital assets have grown in both popularity and market size, the U.S.
It is possible that any jurisdiction may, in the near or distant future, adopt laws, regulations, interpretations, policies, rules or guidance directly or indirectly affecting a digital asset network, generally, or restricting the right to acquire, own, hold, sell, convert, trade, or use digital assets, or to exchange digital assets for either fiat currency or other virtual currency.
The Company is targeting marketing and sales of its Arculus Business Solutions to existing payment card issuer clients and their co-brand partners, including traditional financial institutions, fintech companies and other digital asset exchanges.
The Company targets marketing and sales of its Arculus Business Solutions to existing payment card issuer clients and their co-brand partners, as well as other traditional financial institutions, fintech companies, digital asset exchanges and other businesses.
The Company has developed long-term relationships with its largest customers, including nineteen years with American Express and fifteen years with JP Morgan Chase, across multiple RFP cycles with both companies, as well as eight years with CapitalOne. 12 The proven value proposition of the Company’s premium metal payment cards supports card issuers’ acquisition and retention of consumer and business card customers.
The Company has developed long-term relationships with its largest customers, including nearly twenty years with American Express and nearly sixteen years with JP Morgan Chase, across multiple RFP cycles with both companies. The proven value proposition of the Company’s premium metal payment cards supports card issuers’ acquisition and retention of consumer and business card customers.
The Arculus Secure Authentication Solution allows clients to generate and store their FIDO2 security key on a custom branded metal card, rather than a clunky and generic USB dongle or other hardware token, resulting in a smooth customer experience and increased brand loyalty with each tap-to-authenticate interaction. • White-Labeled Cold Storage – The Company also offers a white-labeled cold storage wallet in the form of a premium metal card, to give consumers the ability to make transactions and store the private keys to their digital assets in a single metal card.
The Arculus Authenticate solutions allow clients to generate and store their FIDO2 security key on a custom branded metal card, rather than a clunky and generic USB dongle or other hardware token, resulting in a smooth customer experience and increased brand loyalty with each tap-to-authenticate interaction. • White-Labeled Cold Storage – The Company provides white-labeled cold storage wallets in the form of a premium metal cards, to give consumers the ability to make transactions and store the private keys to their digital assets in the same metal cards.
The Company has a strong focus on protecting its proprietary intellectual property. As of March 2022, the Company had more than 58 U.S. and foreign (utility and design) patents issued, more than 33 U.S. and foreign (utility and design) patent applications pending, and new technologies under development.
The Company has a strong focus on protecting its proprietary intellectual property. As of February 2024, the Company had more than 60 U.S. and foreign (utility and design) patents issued, more than 35 U.S. and foreign (utility and design) patent applications pending, and new technologies under development.
Even in light of the recent turmoil in the digital asset markets, the Company believes digital assets will continue to have a significant impact on new global financial and security frameworks and will present significant monetization opportunities. Crypto.com reported that global cryptocurrency users increased 39% in 2022 from 306 million to 425 million.
Even in light of the recent turmoil in the digital asset markets, the Company believes digital assets will continue to have a significant impact on new global financial and security frameworks and will present significant monetization opportunities. Crypto.com reported that global cryptocurrency users increased 34% in 2023 from 423 million in January 2023 to 580 million in December 2023.
The Company considers relations with its employees to be good and has never experienced any work stoppages or strikes as a result of labor disputes.
The Company considers relations with its employees to be good, and we measure this with annual employee engagement surveys. The Company has never experienced any work stoppages or strikes as a result of labor disputes.
The Company’s largest clients are American Express and JP Morgan Chase. Together these clients represented 67.3% (or individually, approximately 34.7% and 32.6%, respectively) of our net sales for the year ended December 31, 2022, and 71.9% (or individually, approximately 34.5% and 37.4%, respectively) of our net sales for the year ended December 31, 2021.
The Company’s largest clients are American Express and JP Morgan Chase. Together these clients represented 70.5% (or individually, approximately 28.8% and 41.7%, respectively) of our net sales for the year ended December 31, 2023, and 67.3% (or individually, approximately 34.7% and 32.6%, respectively) of our net sales for the year ended December 31, 2022.
The market for digital security, authentication and digital asset storage products and services is highly fragmented today. The Company competes for business sales with other providers of digital security, authentication and storage products and services.
The market for digital security, authentication and digital asset storage products and services is highly fragmented today. The Company's Arculus Business Solutions compete for business sales with other providers of security, authentication and digital asset storage products and services.
The Company believes there is a compelling market opportunity to provide payment card issuers, and other existing and prospective metal card clients, secure authentication solutions to meet the growing demand to enhance consumer security, through the use of a premium metal card - Powered by Arculus. Today’s digital world leaves consumer assets exposed to fraud, hacking and other dangers.
The Company believes there is a compelling market opportunity to provide payment card issuers, and other existing and prospective metal card clients, secure authentication solutions to meet the growing demand to enhance consumer security, through the use of a premium metal card as a hardware authentication token - Powered by Arculus .
Even with its long-term track record of growth and leadership in metal payment card solutions, the Company’s sales volume in 2022 represented less than 0.7% of estimated addressable market, indicating substantial opportunity for further penetration of the global payment card market. Presently, the Company's metal payment card growth activities are targeted in these primary areas: Domestic Expansion .
Even with its long-term track record of growth and leadership in metal payment card solutions, the Company’s sales volume of payment cards in 2023 represented less than 0.7% of estimated addressable market for payment cards, indicating substantial opportunity for further penetration of the global payment card market.
In 2010, for the JP Morgan Chase Sapphire Preferred ® program, the Company created the first metal payment card targeting the mass affluent segment, significantly expanding the potential number of cardholders that issuers could address with metal payment cards. In 2017, the Company introduced the first large-scale NFC-integrated dual-interface metal payment cards for the American Express ® Platinum ® program.
In 2010, for the JP Morgan Chase Sapphire Preferred ® program, the Company created the first metal payment card targeting the mass affluent segment, significantly expanding the potential number of cardholders that issuers could address with metal payment cards.
As of March 2022, the Company had more than 58 U.S. and foreign patents issued, more than 33 pending U.S. and foreign patent applications, 21 families of U.S. and foreign trademarks/service marks registered and/or applied for across 27 jurisdictions.
As of February 2024, the Company had more than 60 U.S. and foreign patents issued, more than 35 pending U.S. and foreign patent applications, 18 families of U.S. and foreign trademarks/service marks registered and/or applied for across 27 jurisdictions.
Hot storage wallets generate and store private and public keys and digitally 10 sign transactions within Internet-connected devices where storage of the keys is hosted by a third-party custodian.
Wallets enable users to access and monitor their digital assets and initiate transactions. Hot storage wallets generate and store private and public keys and digitally sign transactions within Internet-connected devices where storage of the keys is hosted by a third-party custodian.
Security attacks are increasing, with both external and internal threats of growing concern to consumers and industry participants. Use of secure authentication provides a high level of security for passwordless authentication.
Security attacks are increasing and represent a growing concern to consumers and industry participants. Use of secure authentication through a hardware token provides a high level of security for passwordless authentication.
International Expansion . The Company’s net sales from non-U.S. metal payment card programs in 2022 totaled $83 million, more than four times its 2018 net sales of $19 million from non-U.S. programs.
The Company’s net sales from non-U.S. metal payment card programs in 2023 totaled $70 million, nearly four times its 2018 net sales of $19 million from non-U.S. programs.
The Arculus Cold Storage Solution works across exchanges, marketplaces, and platforms to bring convenience into the world of self-custody — allowing consumers to simply and securely access their digital assets. • Payments + Arculus Cold Storage – The Company also expects to offer the combination of Arculus digital asset cold storage capabilities with a premium metal payment card to give consumers the ability to make transactions and store the private keys to their digital assets in a single metal card.
The Arculus Cold Storage solutions work across exchanges, marketplaces, and platforms to bring convenience into the world of self-custody — allowing consumers to simply and securely access their digital assets. • Payments + Arculus Cold Storage – The Company provides the combination of Arculus Cold Storage combined in premium metal payment cards to give consumers the ability to make transactions and store the private keys to their digital assets in the same metal cards.
The risk of loss of valuable assets by consumers and other industry participants is driving the need for more advanced security solutions to protect these digital assets against fraud and theft. It is estimated that about $10 billion in 2021, and $3.8 billion in 2022, in digital assets were stolen from consumers.
The risk of loss of valuable assets 10 by consumers and other industry participants is driving the need for more advanced security solutions to protect these digital assets against fraud and theft.
In 2022, the Company also achieved: • ICMA (International Card Manufacturers Association) EcoLabel Standard certification and verified assurance on the Company’s ceramic metal hybrid dual-interface card and metal veneer dual-interface card products in the recycled content category; ◦ Environmental Claim Validation from UL, the global safety science leader and one of the world’s leading sources for credible and sustainable product information, for the Company’s ceramic metal hybrid dual-interface card, metal hybrid dual-interface card and metal veneer dual-interface card products; and ◦ ISO 14001 certification due to its improved sustainability operations by reducing waste, improving efficiency and enhancing operations using a systematic approach. 17 The Company’s manufacturing operations are subject to compliance with Federal, state and local environmental protection regulations, including those governing the emissions of pollutants into the air, wastewater discharges, the use and handling of hazardous substances, waste disposal, the investigation and remediation of soil and groundwater contamination.
In 2022, the Company achieved: • ICMA (International Card Manufacturers Association) EcoLabel Standard certification and verified assurance on the Company’s ceramic metal hybrid dual-interface card and metal veneer dual-interface card products in the recycled content category; ◦ Environmental Claim Validation from UL, the global safety science leader and one of the world’s leading sources for credible and sustainable product information, for the Company’s ceramic metal hybrid dual-interface card, metal hybrid dual-interface card and metal veneer dual-interface card products; and ◦ ISO 14001 certification due to its improved sustainability operations by reducing waste, improving efficiency and enhancing operations using a systematic approach.
The Company provides an innovative offering to the market and believes that the Company’s plans to combine payment cards with secure authentication and digital asset storage solutions positions the Company to address a specific, growing need of payment card issuers, fintechs, and other businesses seeking to enhance their customers’ security.
The Company offerings of Arculus Authenticate and Arculus Cold Storage, and its ability to combine payment cards with secure authentication and digital asset storage solutions, positions the Company to address a specific, growing need of payment card issuers, fintechs, and other businesses seeking to enhance their customers’ security.
With over 555 million passwords stolen since 2017, Arculus provides a more secure option for businesses and their customers, offering a best-in-class, passwordless and secure authentication experience. The Arculus Secure Authentication Solution is FIDO2 certified, and the Company has obtained approval by Mastercard and Visa to produce metal payment cards with authentication capabilities.
With over 24 billion passwords exposed by hackers in 2022 alone, Arculus Authenticate provides a more secure option for businesses and their customers, offering a best-in-class, passwordless and hardware-based, secure authentication experience. The Arculus Authenticate solutions are FIDO2 certified, and the Company has obtained approval by Mastercard and Visa to produce metal payment cards with authentication capabilities.
The Company is now accelerating innovation in secure authentication technology solutions with the launch of Arculus (named for the ancient Roman god of safes and strongboxes). Arculus is a digital security platform with broad industry applicability.
The Company’s metal payment card solutions have generated, and are expected to continue to generate, a significant base of growing, highly profitable revenue. The Company is now accelerating innovation in secure authentication technology solutions with the launch of Arculus (named for the ancient Roman god of safes and strongboxes). Arculus is a digital security platform with broad industry applicability.
The Company's master service agreement with American Express (the “Amex Agreement”) will be up for renewal on December 31, 2024. Typically, the Company renews such client agreements upon their expiration in the ordinary course of business.
The current statement of work issued pursuant to the Company's master services agreement with American Express (the “Amex Agreement”) was extended during 2023, and will be up for renewal on July 31, 2026. Typically, the Company renews such client agreements upon their expiration in the ordinary course of business.
NFC refers to the near-field communications protocol which enables RFID (i.e., radio-frequency identification) communications between payment cards and payment terminals. Dual-interface payment cards today comprise the majority of the Company’s sales volume because of the speed and convenience they offer to cardholders. In 2022, the Company began offering payment cards with Arculus secure authentication and cold storage functionality.
Dual-interface payment cards today comprise the majority of the Company’s sales volume because of the speed and convenience they offer to cardholders. In 2022, the Company began offering payment cards with Arculus Authenticate and Arculus Cold Storage functionality.
Indirect Sales . The Company has been expanding its relationships with a variety of card ecosystem partners, such as plastic card manufacturers and personalization partners throughout the world.
Indirect Sales . The Company has been expanding its relationships with a variety of card ecosystem partners, such as plastic card manufacturers and personalization partners throughout the world. Personalization is the process of encoding, programming and printing, embossing or laser engraving a payment card with the cardholder’s name, account number and other information.
Website and App developers are trying to mitigate these dangers, but consumers are faced with antiquated and expensive security solutions that have complicated user experiences including usernames and passwords at risk for being stolen or otherwise compromised.
Today’s digital world leaves consumer assets exposed to fraud, hacking and other dangers. Financial institutions, credit card issuers and other businesses are trying to mitigate these dangers, but consumers are faced with antiquated and expensive security solutions that have complicated user experiences including usernames and passwords which remain at risk for being stolen or otherwise compromised.
Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance of digital assets by users, merchants and service providers outside the United States and may therefore impede the growth or sustainability of the digital asset economy in these jurisdictions as well as in the United States and elsewhere, or otherwise negatively affect the value of digital assets.
Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance of digital assets by users, merchants and service providers outside the United States and may therefore impede the growth or sustainability of the digital asset economy in these jurisdictions as well as in the United States and elsewhere, or otherwise negatively affect the value of digital assets. 19 Positively Impacting our Environment and Community To solidify the Company's long-standing commitment to making sustainable choices, in 2022 and 2023, the Company began a strategic project to formalize its approach to environment, social and governance matters ("ESG").
In addition to new products and revenue opportunities, the Company’s Innovation Lab is continually focused on improvements in manufacturing processes to drive efficiency, increase capacity, improve sustainability, and reduce waste to support enhanced operating leverage and profitability. The Company's use of 65% post-consumer recycled stainless steel in its metal card products is a major sustainability advantage over plastic cards.
In addition to new products and revenue opportunities, the Company’s research and development team is continually focused on improvements in manufacturing processes to drive efficiency, increase capacity, improve sustainability, and reduce waste to support enhanced operating leverage and profitability.
The number of issuers adopting metal programs continues to increase, and there has been an increase in card issuers expanding their metal card programs to additional proprietary and co-branded portfolios. The Company’s marketing and sales activities target opportunities to expand metal card programs for existing customers and to introduce metal form factors to new card issuer clients in the U.S.
The number of issuers adopting metal programs continues to increase, and there has been an increase in card issuers expanding their metal card programs to additional proprietary and co-branded portfolios.
From 2010 through 2022, the Company produced and sold approximately 144 million metal payment cards worldwide (i.e., credit and debit cards issued on one of the Visa, MasterCard, American Express, Discover, and China Union Pay payment networks).
From 2010 through 2023, the Company produced and sold approximately 175 million metal payment cards worldwide (i.e., credit and debit cards issued primarily on one of the Visa, MasterCard, American Express, Discover payment networks). In 2023 alone, the Company provided metal payment card solutions for more than 150 branded and co-branded card programs, totaling approximately 31 million payment cards sold.
The Company has a track record of more than two decades of pioneering continuous payment card innovation in metal form factors.
Its metal payment cards are currently issued typically on the Visa ® , Mastercard ® , American Express ® , and China Union Pay ® payment networks. The Company has a track record of more than two decades of pioneering continuous payment card innovation in metal form factors.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

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Biggest changeNotwithstanding the foregoing, these provisions of the Bylaws will not apply to any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of 42 Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery (including suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive forum), or for which the Court of Chancery does not have subject matter jurisdiction.
Biggest changeOur Bylaws provide that, unless we consent in writing to the selection of an alternative forum, (a) any derivative action or proceeding brought on behalf of us, (b) any action asserting a claim of breach of fiduciary duty owed by any of our directors, officers or employees to us or our stockholders, (c) any action asserting a claim against us, our directors, officers or employees arising pursuant to any provision of the DGCL or our Charter or Bylaws or (d) any action asserting a claim against us, our directors, officers or employees governed by the internal affairs doctrine. 44 Notwithstanding the foregoing, these provisions of the Bylaws will not apply to any claim as to which the Court of Chancery determines that there is an indispensable party not subject to the jurisdiction of the Court of Chancery (and the indispensable party does not consent to the personal jurisdiction of the Court of Chancery within ten days following such determination), which is vested in the exclusive jurisdiction of a court or forum other than the Court of Chancery (including suits brought to enforce any liability or duty created by the Exchange Act or any other claim for which the federal district courts of the United States of America are the sole and exclusive forum), or for which the Court of Chancery does not have subject matter jurisdiction.
As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this report, or in any document incorporated by reference herein, are not the only risks and uncertainties that we face.
As a result, the market price of our securities could decline, and you could lose all or part of your investment. Additionally, the risks and uncertainties described in this report, or in any document incorporated by reference herein, are not the only risks and uncertainties that we face.
For example, the Commodities Futures Trading Commission (“CFTC”) has designated bitcoin, a form of digital asset that frequently is referred to as a , as a commodity, and as such, trades in bitcoin are subject to the CFTC’s antifraud authority.
For example, the Commodities Futures Trading Commission (“CFTC”) has designated bitcoin, a form of digital asset that frequently is referred to as a commodity, and as such, trades in bitcoin are subject to the CFTC’s antifraud authority.
Our failure to comply with applicable laws or regulations, or the costs associated with defending any action alleging our noncompliance with applicable laws or regulations, could materially and adversely affect us,our business and our results of operations.
Our failure to comply with applicable laws or regulations, or the costs associated with defending any action alleging our noncompliance with applicable laws or regulations, could materially and adversely affect us, our business and our results of operations.
If we are found by relevant regulatory agencies to have inadvertently acted as an unregistered broker-dealer with respect to purchase and swap transactions in particular digital assets, we would expect to immediately cease supporting purchase and swap transactions in those digital assets unless and until either the digital asset at issue is determined by the SEC or a judicial ruling to not be a security or we partner with a third-party registered broker-dealer or investment adviser, acquire a registered 27 broker-dealer or investment adviser or register the Company as a securities broker-dealer or investment adviser, any of which we may elect not to do or may not be successful in doing.
If we are found by relevant regulatory agencies to have inadvertently acted as an unregistered broker-dealer with respect to purchase and swap transactions in particular digital assets, we would expect to immediately cease supporting purchase and swap transactions in those digital assets unless and until either the digital asset at issue is determined by the SEC or a judicial ruling to not be a security or we partner with a third-party registered broker-dealer or investment adviser, acquire a registered broker-dealer or investment adviser or register the Company as a securities broker-dealer or investment adviser, any of which we may elect not to do or may not be successful in doing.
Notably, in September 2022, the SEC proposed a rule change concerning the definition of “exchange.” While it is not yet clear whether or in what form such proposed rule change may be adopted, it is possible that a change to the definition of “exchange” could result in regulators determining that the Arculus Cold Storage Wallet is functioning as a securities exchange or ATS or is part of an unregistered exchange mechanism, in which case, the potential registration requirements, or cessation, limitation or other modifications contemplated above could become necessary or advisable.
In September 2022, the SEC proposed a rule change concerning the definition of “exchange.” While it is not yet clear whether or in what form such proposed rule change may be adopted, it is possible that a change to the definition of “exchange” could result in regulators determining that the Arculus Cold Storage Wallet is functioning as a securities exchange or ATS or is part of an unregistered exchange mechanism, in which case, the potential registration requirements, or cessation, limitation or other modifications contemplated above could become necessary or advisable.
Our indebtedness could have important consequences to our investors, including, but not limited to: 34 • increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions; • requiring the dedication of a substantial portion of our cash flow from operations to servicing debt, including interest payments and annual excess cash flow prepayment obligations; • limiting our flexibility in planning for, or reacting to, changes in our business and the competitive environment; and • limiting our ability to borrow additional funds and increasing the cost of any such borrowing.
Our indebtedness could have important consequences to our investors, including, but not limited to: • increasing our vulnerability to, and reducing our flexibility to respond to, general adverse economic and industry conditions; • requiring the dedication of a substantial portion of our cash flow from operations to servicing debt, including interest payments and annual excess cash flow prepayment obligations; • limiting our flexibility in planning for, or reacting to, changes in our business and the competitive environment; and • limiting our ability to borrow additional funds and increasing the cost of any such borrowing.
Furthermore, any material breach of our security systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to mitigate or remedy any damage resulting 23 from system or network disruptions, whether caused by cyberattacks, security breaches or otherwise, which could ultimately adversely affect our business, financial condition and results of operations.
Furthermore, any material breach of our security systems could harm our competitive position, result in a loss of customer trust and confidence, and cause us to incur significant costs to mitigate or remedy any damage resulting from system or network disruptions, whether caused by cyberattacks, security breaches or otherwise, which could ultimately adversely affect our business, financial condition and results of operations.
The warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us provides that the terms of the Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective 39 provision, but requires the approval by the holders of a majority of the then outstanding Public Warrants to make any change that adversely affects the interests of the registered holders.
The warrant agreement between Continental Stock Transfer & Trust Company, as warrant agent, and us provides that the terms of the Warrants may be amended without the consent of any holder to cure any ambiguity or correct any defective provision, but requires the approval by the holders of a majority of the then outstanding Public Warrants to make any change that adversely affects the interests of the registered holders.
Such current or new competitors may develop technologies, processes or products that are better suited to succeed in the marketplace as a result of enhanced features and functionality at lower costs, particularly as technological sophistication of such competitors and the size of the market increase. These factors could lower our average selling prices and reduce 29 gross margins.
Such current or new competitors may develop technologies, processes or products that are better suited to succeed in the marketplace as a result of enhanced features and functionality at lower costs, particularly as technological sophistication of such competitors and the size of the market increase. These factors could lower our average selling prices and reduce gross margins.
More generally, any negative publicity regarding unlawful uses of digital assets in the marketplace could materially reduce the demand for our products and solutions derived from the Arculus Platform. The initial Arculus Cold Storage Wallet uses an architecture where the private keys needed to access digital assets are stored outside of the Internet.
More generally, any negative publicity regarding unlawful uses of digital assets in the marketplace could materially reduce the demand for our products and solutions derived from the Arculus platform. The Arculus Cold Storage Wallet uses an architecture where the private keys needed to access digital assets are stored outside of the Internet.
As a result of these covenants and restrictions, we will be limited in how we conduct our business and we may be unable to raise additional debt or other financing to compete effectively or to take advantage of new business opportunities. The terms of any future 35 indebtedness we may incur could include more restrictive covenants.
As a result of these covenants and restrictions, we will be limited in how we conduct our business and we may be unable to raise additional debt or other financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants.
We may also experience difficult market conditions, such as the recent widespread disruptions in the digital asset industry, that could delay or prevent the successful research and development, marketing launches and consumer deployment of such newly designed products, whereby we could incur significant additional cost and expense.
We may also experience difficult market conditions, such as the recent widespread disruptions in the digital asset industry, that could delay or prevent the 25 successful research and development, marketing launches and consumer deployment of such newly designed products, whereby we could incur significant additional cost and expense.
General Risks Related to Ownership of our Securities Our only significant asset will be our ownership of our subsidiaries’ business. If the business of our subsidiaries is not profitably operated, we may be unable to pay us dividends or make distributions to enable us to pay any dividends on our common stock or satisfy our other financial obligations.
General Risks Related to Ownership of our Securities 38 Our only significant asset will be our ownership of our subsidiaries’ business. If the business of our subsidiaries is not profitably operated, we may be unable to pay us dividends or make distributions to enable us to pay any dividends on our common stock or satisfy our other financial obligations.
We intend to continue devoting resources in support of our distribution partners, but there are no guarantees that these relationships will remain in place over the short-or long-term. In addition, we cannot be assured that any of these distribution partners will continue to generate current levels of customer demand.
We intend to continue devoting resources in support of our distribution partners, but there are 31 no guarantees that these relationships will remain in place over the short-or long-term. In addition, we cannot be assured that any of these distribution partners will continue to generate current levels of customer demand.
For example, 30 product recalls, writing down defective inventory, replacing defective items, lost sales or profits, and third-party claims can all give rise to costs incurred by us. We may also face liability for judgments and/or damages in connection with product liability and warranty claims.
For example, product recalls, writing down defective inventory, replacing defective items, lost sales or profits, and third-party claims can all give rise to costs incurred by us. We may also face liability for judgments and/or damages in connection with product liability and warranty claims.
No adjustments to the exchange ratio of Class B Units for shares of Class A Common Stock will be made as a result of either (i) any cash distribution by Holdings or (ii) any cash that we retain and do not distribute to our stockholders.
No adjustments to the exchange ratio of Class B Units for shares of Class A Common Stock will be made as a result of either (i) any cash distribution by Holdings or (ii) 36 any cash that we retain and do not distribute to our stockholders.
The patents and intellectual property rights we obtain, including our intellectual property rights which 28 are formally registered in the United States and abroad, may be insufficient to provide meaningful protection or commercial advantage. Moreover, we may have difficulty obtaining additional patents and other intellectual property protections in the future.
The patents and intellectual property rights we obtain, including our intellectual property rights which are formally registered in the United States and abroad, may be insufficient to provide meaningful protection or commercial advantage. Moreover, we may have difficulty obtaining additional patents and other intellectual property protections in the future.
While the existing sanctions do not currently prohibit the production and sale of our metal credit cards to this customer, additional sanctions may be 31 imposed in the future that could prevent us from selling to this customer or other customers in the affected regions.
While the existing sanctions do not currently prohibit the production and sale of our metal credit cards to this customer, additional sanctions may be imposed in the future that could prevent us from selling to this customer or other customers in the affected regions.
Currently, there is no uniformly applicable legal or regulatory regime governing digital assets in most jurisdictions, including the U.S. Governments or regulatory authorities may impose new or 26 additional licensing, registration or other compliance requirements on participants in the digital asset industry.
Currently, there is no uniformly applicable legal or regulatory regime governing digital assets in most jurisdictions, including the U.S. Governments or regulatory authorities may impose new or additional licensing, registration or other compliance requirements on participants in the digital asset industry.
The earnings from, or other available assets of, Holdings may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Common Stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.
The earnings from, or other 34 available assets of, Holdings may not be sufficient to pay dividends or make distributions or loans to enable us to pay any dividends on our Common Stock or satisfy our other financial obligations, including our obligations under the Tax Receivable Agreement.
Our ability to achieve benefits from any existing tax basis, tax basis adjustments or other tax attributes, and the payments to be made under the Tax Receivable Agreement, will depend upon a number of factors, including the timing and amount of our future income.
Our ability to achieve benefits from any existing tax basis, tax basis adjustments or other tax attributes, and the payments to be made under the Tax Receivable Agreement, will depend upon a number of factors, including the timing and amount of our future 35 income.
These rates may have consequences that cannot be reasonably predicted and may increase the Company's cost of borrowing in the future. • Risks Related to the ownership of our Securities ◦ Our only significant asset is our ownership of CompoSecure Holdings, L.L.C. ("Holdings").
These rates may have 22 consequences that cannot be reasonably predicted and may increase the Company's cost of borrowing in the future. • Risks Related to the ownership of our Securities ◦ Our only significant asset is our ownership of CompoSecure Holdings, L.L.C. ("Holdings").
To counter such risks, we may have to remove Arculus Cold Storage Wallet support for purchase and swap transactions in certain digital assets if and when such digital assets are designated as securities, which could hurt our business.
To counter such risks, we may have to remove Arculus Cold Storage Wallet support for purchase and swap transactions in certain 29 digital assets if and when such digital assets are designated as securities, which could hurt our business.
Broad market and industry factors may depress the market price of our securities irrespective of our operating performance. The stock market in general and Nasdaq have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected.
Broad market and industry factors may depress the market price of our securities irrespective of our operating performance. The stock market in general and the Nasdaq Global Market have experienced price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of the particular companies affected.
The accelerated payments required in such circumstances will be calculated by reference to the present value (at a discount rate equal to the lesser of (i) 6.5% per annum and (ii) one year LIBOR, or its successor rate, plus 100 basis points) of all future payments that holders of Holdings Class B Units or other recipients would have been entitled to receive under the Tax Receivable Agreement, and such accelerated payments and any other future payments under the Tax Receivable Agreement will utilize certain valuation assumptions, including that we will have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the Tax Receivable Agreement and sufficient taxable income to fully utilize any remaining net operating losses subject to the Tax Receivable Agreement on a straight line basis over the shorter of the statutory expiration period for such net operating losses and the five-year period after the early termination or change of control.
The accelerated payments required in such circumstances will be calculated by reference to the present value (at a discount rate equal to the lesser of (i) 6.5% per annum and (ii) one year LIBOR (as defined below), or its successor rate, plus 100 basis points) of all future payments that holders of Holdings Class B Units or other recipients would have been entitled to receive under the Tax Receivable Agreement, and such accelerated payments and any other future payments under the Tax Receivable Agreement will utilize certain valuation assumptions, including that we will have sufficient taxable income to fully utilize the deductions arising from the increased tax deductions and tax basis and other benefits related to entering into the Tax Receivable Agreement and sufficient taxable income to fully utilize any remaining net operating losses subject to the Tax Receivable Agreement on a straight line basis over the shorter of the statutory expiration period for such net operating losses and the five-year period after the early termination or change of control.
We have administrative, technical, and physical security measures in place, and we have policies and procedures in place to both evaluate the security protocols and practices of our vendors and to contractually require service providers to whom we disclose data to implement and maintain reasonable privacy and security measures.
We have administrative, technical, and physical security measures in place, and we have policies and procedures in place to both evaluate the security protocols and practices of our vendors and to contractually require 24 service providers to whom we disclose data to implement and maintain reasonable privacy and security measures.
A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future. Our Public Warrants and the Resale Warrants may never be in the money, and they may expire worthless.
A decline in the market price of our securities also could adversely affect our ability to issue additional securities and our ability to obtain additional financing in the future. Our Public Warrants may never be in the money, and they may expire worthless.
Our guarantees of indebtedness could have significant negative consequences for our security holders, equity holders and our business, results of operations and financial condition by, among other things: • increasing our vulnerability to adverse economic and industry conditions; • limiting our ability to obtain additional financing; • requiring the dedication of a substantial portion of our cash flow from operations to service our guarantees of indebtedness, which reduces the amount of cash available for other purposes; • limiting our flexibility to plan for, or react to, changes in our business; • diluting the interests of our stockholders as a result of the issuance shares of our Class A Common Stock upon conversion of the PIPE Senior Notes; and • placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Our guarantees of indebtedness could have significant negative consequences for our security holders, equity holders and our business, results of operations and financial condition by, among other things: • increasing our vulnerability to adverse economic and industry conditions; • limiting our ability to obtain additional financing; • requiring the dedication of a substantial portion of our cash flow from operations to service our guarantees of indebtedness, which reduces the amount of cash available for other purposes; • limiting our flexibility to plan for, or react to, changes in our business; • diluting the interests of our stockholders as a result of the issuance shares of our Class A Common Stock upon conversion of the exchangeable notes; and • placing us at a possible competitive disadvantage with competitors that are less leveraged than us or have better access to capital.
Legal and contractual restrictions in agreements governing the indebtedness of the 36 Company or its subsidiaries, as well as their financial condition and operating requirements, may limit the ability of our subsidiaries to make distributions to the Company.
Legal and contractual restrictions in agreements governing the indebtedness of the Company or its subsidiaries, as well as their financial condition and operating requirements, may limit the ability of our subsidiaries to make distributions to the Company.
These sales, or the perception in the market that the holders of a large number of securities intend to sell securities, could reduce the market price of our securities. Item 1B. Unresolved Staff Comments None.
These sales, or the perception in the market that the holders of a large number of securities intend to sell securities, could reduce the market price of our securities. Item 1B. Unresolved Staff Comments None. 45
If the business of Holdings is not profitably operated, we may be unable to pay us dividends or make distributions to enable us to pay any dividends on our common stock or satisfy our other financial obligations. ◦ Provisions in our charter and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management. ◦ As an “emerging growth company,” we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors. ◦ If our performance does not meet market expectations, the price of our securities may decline. ◦ The Warrants may never be in the money, and they may expire worthless.Investing in our securities involves risks.
If the business of Holdings is not profitably operated, we may be unable to pay us dividends or make distributions to enable us to pay any dividends on our common stock or satisfy our other financial obligations. ◦ Provisions in our charter and Delaware law may inhibit a takeover of us, which could limit the price investors might be willing to pay in the future for our common stock and could entrench management. ◦ As an “emerging growth company,” we cannot be certain if the reduced disclosure requirements applicable to “emerging growth companies” will make our common stock less attractive to investors. ◦ If our performance does not meet market expectations, the price of our securities may decline. ◦ The Warrants may never be in the money, and they may expire worthless.
If we are not able to implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse 40 regulatory consequences and could harm investor confidence and lead to a decrease in the market price of our securities.
If we are not able to 42 implement the additional requirements of Section 404 in a timely manner or with adequate compliance, we may not be able to assess whether our internal controls over financial reporting are effective, which may subject us to adverse regulatory consequences and could harm investor confidence and lead to a decrease in the market price of our securities.
We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. Many of our products integrate third-party technologies that we license or otherwise obtain the right to use. We have entered into licensing agreements that provide access to technology owned by third parties.
We rely on licensing arrangements in production and other fields, and actions taken by any of our licensing partners could have a material adverse effect on our business. Some of our products integrate third-party technologies that we license or otherwise obtain the right to use. We have entered into licensing agreements that provide access to technology owned by third parties.
Our ability to safeguard our proprietary product designs and production processes against misappropriation by third parties is necessary to maintain our competitive position within our industry.
Our ability to safeguard our proprietary product designs and production processes against misappropriation by third parties is 30 necessary to maintain our competitive position within our industry.
Each Warrant entitles its holder to purchase one share of our common stock at an exercise price of $11.50 per share and will expire at 5:00 p.m., New York time, on December 27, 2026 or earlier upon redemption of our Class A Common Stock or our liquidation.
Each Warrant entitles its holder to purchase one share of our common stock at an exercise price of $11.50 per share and will expire at 5:00 p.m., New York time, on December 15, 2026 or earlier upon redemption of our Class A Common Stock or our liquidation.
The registration and availability of such a significant number of securities for trading in the public market may increase the volatility in 41 the price of our securities or put significant downward pressure on the price of our securities. In addition, we may use shares of our common stock as consideration for future acquisitions, which could further dilute our stockholders.
The registration and 43 availability of such a significant number of securities for trading in the public market may increase the volatility in the price of our securities or put significant downward pressure on the price of our securities. In addition, we may use shares of our common stock as consideration for future acquisitions, which could further dilute our stockholders.
In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure for public companies, including Dodd Frank, the Sarbanes-Oxley Act, regulations related hereto and the rules and regulations of the SEC and Nasdaq, have increased the costs and the time that must be devoted to compliance matters.
In addition, new and changing laws, regulations and standards relating to corporate governance and public disclosure for public companies, including Dodd Frank, the Sarbanes-Oxley Act, regulations related hereto and the rules and regulations of the SEC and the Nasdaq Global Market, have increased the costs and the time that must be devoted to compliance matters.
Our international sales subject us to additional risks that can adversely affect our business, operating results and financial condition. During each of 2022 and 2021, we derived 22% and 18% of our revenue from sales to customers located outside the U.S.
Our international sales subject us to additional risks that can adversely affect our business, operating results and financial condition. During each of 2023 and 2022, we derived 18% and 22% of our revenue from sales to customers located outside the U.S.
Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed above under “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the specific risks set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results of 21 operations.
Investing in our securities involves risks. Before you make a decision to buy our securities, in addition to the risks and uncertainties discussed above under “Cautionary Note Regarding Forward-Looking Statements,” you should carefully consider the specific risks set forth herein. If any of these risks actually occur, it may materially harm our business, financial condition, liquidity and results of operations.
There can be no assurance that the Public Warrants and Resale Warrants will ever be in the money prior to their expiration and, as such, the Public Warrants and Resale Warrants may expire worthless. The terms of our Warrants may be amended in a manner that may be adverse to the holders.
There can be no 41 assurance that the Public Warrants will ever be in the money prior to their expiration and, as such, the Public Warrants may expire worthless. The terms of our Warrants may be amended in a manner that may be adverse to the holders.
The Tax Receivable Agreement will provide for the payment by us to certain Holders of 90% of the benefits, if any, that we are deemed to realize (calculated using certain assumptions) as a result of (i) our allocable share of existing tax basis in the assets of Holdings and its subsidiaries acquired (A) in the Business Combination and (B) upon sales or exchanges of Holdings Units pursuant to the Exchange Agreement after the Business Combination, (ii) certain increases in tax basis that occur as a result of (A) the Business Combination and (B) sales or exchanges of Holdings Units pursuant to the Exchange Agreement after the Business Combination, and (iii) certain other tax benefits, including tax benefits attributable to payments under the Tax Receivable 32 Agreement.
The Tax Receivable Agreement provides for the payment by us to certain Holders of 90% of the benefits, if any, that we are deemed to realize (calculated using certain assumptions) as a result of (i) our allocable share of existing tax basis in the assets of Holdings and its subsidiaries acquired (A) in the Business Combination and (B) upon sales or exchanges of Holdings Units pursuant to the Exchange Agreement after the Business Combination, (ii) certain increases in tax basis that occur as a result of (A) the Business Combination and (B) sales or exchanges of Holdings Units pursuant to the Exchange Agreement after the Business Combination, and (iii) certain other tax benefits, including tax benefits attributable to payments under the Tax Receivable Agreement.
We may be unable to satisfy the Nasdaq listing requirements in the future, which could limit investors’ ability to effect transactions in our securities and subject us to additional trading restrictions. We may be unable to maintain the listing of our securities on Nasdaq in the future.
We may be unable to satisfy the Nasdaq Global Market listing requirements in the future, which could limit investors’ ability to effect transactions in our securities and subject us to additional trading restrictions. We may be unable to maintain the listing of our securities on the Nasdaq Global Market in the future.
Our international operations subject it to a variety of risks and challenges, including: • fluctuations in currency exchange rates and related effect on our operating results; • general economic and geopolitical conditions in each country or region; • the impact of Brexit; reduction in billings, foreign currency exchange rates, and trade with the EU; • the effects of a widespread outbreak of an illness or disease, or any other public health crisis, including the COVID-19 pandemic, in each country or region; • economic uncertainty around the world; and • compliance with U.S. laws and regulations imposed by other countries on foreign operations, including the Foreign Corrupt Practices Act, the U.K.
Our international operations subject it to a variety of risks and challenges, including: 33 • fluctuations in currency exchange rates and related effect on our operating results; • general economic and geopolitical conditions, including wars, in each country or region; • the impact of Brexit; reduction in billings, foreign currency exchange rates, and trade with the EU; • the effects of a widespread outbreak of an illness or disease, or any other public health crisis, such as a resurgence of the COVID-19 pandemic, in each country or region; • economic uncertainty around the world; and • compliance with U.S. laws and regulations imposed by other countries on foreign operations, including the Foreign Corrupt Practices Act, the U.K.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts that may become due under our guarantees of indebtedness, including in connection with the PIPE Senior Notes, and our cash needs may increase in the future.
Our business may not generate sufficient funds, and we may otherwise be unable to maintain sufficient cash reserves, to pay amounts that may become due under our guarantees of indebtedness, including in connection with the exchangeable notes, and our cash needs may increase in the future.
Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: effectively identify and capitalize upon opportunities in new and emerging product markets; invest resources in innovation and research and development; complete and introduce new products and integrated services solutions in a timely manner; license any required third-party technology or intellectual property rights; qualify for and obtain required industry certification for our products; and retain and hire talent experienced in developing new products and services.
Our ability to develop and deliver new products and services successfully will depend on various factors, including our ability to: effectively identify and capitalize upon opportunities in new and emerging product markets; invest resources in innovation and research and development; develop and implement new processes for the manufacture or offer of new products or services; complete and introduce new products and integrated services solutions in a timely manner; license any required third-party technology or intellectual property rights; qualify for and obtain required industry certification for our products; and retain and hire talent experienced in developing new products and services.
Because certain significant shareholders control a significant percentage of our common stock, such shareholders may influence major corporate decisions of the Company and our interests may conflict with the interests of other holders of our common stock. At March 1, 2023, LLR Equity Partners IV, L.P. and LLR Equity Partners Parallel IV, L.P. (the “LLR Parties”) and Michele D.
Because certain significant shareholders control a significant percentage of our common stock, such shareholders may influence major corporate decisions of the Company and our interests may conflict with the interests of other holders of our common stock. At March 04, 2024, LLR Equity Partners IV, L.P. and LLR Equity Partners Parallel IV, L.P. (the “LLR Parties”) and Michele D.
We have the ability to redeem outstanding Warrants (excluding any Resale Warrants held by Roman DBDR Tech Sponsor, LLC ("Roman Sponsor") or their permitted transferees) at any time after they become exercisable and prior to their expiration, at $0.01 per warrant, provided that the last reported sales price (or the closing bid price of our common stock in the event the shares of our common stock are not traded on any specific trading day) of the common stock equals or exceeds $18.00 per share on each of 20 trading days within the 30 trading-day period ending on the third business day prior to the date on which we send proper notice of such redemption, provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the Warrants, we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available.
We have the ability to redeem outstanding Warrants at any time after they become exercisable and prior to their expiration, at $0.01 per warrant, provided that the last reported sales price (or the closing bid price of our common stock in the event the shares of our common stock are not traded on any specific trading day) of the common stock equals or exceeds $18.00 per share on each of 20 trading days within the 30 trading-day period ending on the third business day prior to the date on which we send proper notice of such redemption, provided that on the date we give notice of redemption and during the entire period thereafter until the time we redeem the Warrants, we have an effective registration statement under the Securities Act covering the shares of common stock issuable upon exercise of the Warrants and a current prospectus relating to them is available.
Any of the factors listed below could have a material adverse effect on your investment in our securities and our securities may trade at prices significantly below the price you paid for them. 38 Factors affecting the trading price of our securities may include: • actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; ◦ changes in the market’s expectations about our operating results; ◦ success of competitors; ◦ our operating results failing to meet market expectations in a particular period; ◦ changes in financial estimates and recommendations by securities analysts concerning us or the financial payment card and digital asset industries and markets in general; ◦ operating and stock price performance of other companies that investors deem comparable to us; ◦ our ability to market new and enhanced products on a timely basis; ◦ changes in laws and regulations affecting our business; ◦ commencement of, or involvement in, litigation involving us; ◦ changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; ◦ the volume of shares of our securities available for public sale; ◦ any significant change in our board or management; ◦ sales of substantial amounts of our securities by our directors, executive officers or significant stockholders or the perception that such sales could occur; and ◦ general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
Factors affecting the trading price of our securities may include: • actual or anticipated fluctuations in our quarterly financial results or the quarterly financial results of companies perceived to be similar to us; ◦ changes in the market’s expectations about our operating results; ◦ success of competitors; ◦ our operating results failing to meet market expectations in a particular period; ◦ changes in financial estimates and recommendations by securities analysts concerning us or the financial payment card and digital asset industries and markets in general; ◦ operating and stock price performance of other companies that investors deem comparable to us; ◦ our ability to market new and enhanced products on a timely basis; ◦ changes in laws and regulations affecting our business; ◦ commencement of, or involvement in, litigation involving us; ◦ changes in our capital structure, such as future issuances of securities or the incurrence of additional debt; ◦ the volume of shares of our securities available for public sale; ◦ any significant change in our board or management; ◦ sales of substantial amounts of our securities by our directors, executive officers or significant stockholders or the perception that such sales could occur; and ◦ general economic and political conditions such as recessions, interest rates, fuel prices, international currency fluctuations and acts of war or terrorism.
A loss of distribution partners could adversely affect our business. ◦ We face competition that may result in a loss of our market share and/or a decline in profitability. • Risks Related to our Indebtedness ◦ We have a substantial amount of indebtedness, which may limit our operating flexibility and could adversely affect our business, financial condition and results of operations. ◦ Upon the occurrence of an event of default relating to the Company's credit facility, the lenders could elect to accelerate payments due and terminate all commitments to extend further credit. ◦ The debt outstanding under the Company's existing credit facility has a variable rate of interest that is currently based on LIBOR and will be converting to the Secured Overnight Financing Rate (“SOFR”) prior to the sunset deadline of June 30, 2023.
A loss of distribution partners could adversely affect our business. ◦ We face competition that may result in a loss of our market share and/or a decline in profitability. • Risks Related to our Indebtedness ◦ We have a substantial amount of indebtedness, which may limit our operating flexibility and could adversely affect our business, financial condition and results of operations. ◦ Upon the occurrence of an event of default relating to the Company's credit facility, the lenders could elect to accelerate payments due and terminate all commitments to extend further credit. ◦ The debt outstanding under the Company's existing credit facility has a variable rate of interest that is currently based on the Secured Overnight Financing Rate (“SOFR”).
We will incur significant costs and obligations as a result of being a public company. As a new public company, we will incur significant legal, accounting, insurance and other expenses. These expenses will increase once we are no longer an “emerging growth company” as defined under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
As a public company, we incur significant legal, accounting, insurance and other expenses. These expenses will increase once we are no longer an “emerging growth company” as defined under the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
Logan and any trust, entity or other similar vehicle or account affiliated with Michele D. Logan (the “Logan Parties”) beneficially own approximately 44% and 28%, respectively of the voting power of our outstanding common stock.
Logan and any trust, entity or other similar vehicle or account affiliated with Michele D. Logan (the “Logan Parties”) beneficially own approximately 43% and 27%, respectively of the voting power of our outstanding common stock.
Risks Related to Our Indebtedness We have a substantial amount of indebtedness, which may limit our operating flexibility and could adversely affect our business, financial condition and results of operations. We had approximately $363.1 million of indebtedness as of December 31, 2022, consisting of amounts outstanding under our senior secured credit facility and senior notes.
Risks Related to Our Indebtedness We have a substantial amount of indebtedness, which may limit our operating flexibility and could adversely affect our business, financial condition and results of operations. We had approximately $340.3 million of indebtedness as of December 31, 2023, consisting of amounts outstanding under our senior secured credit facility and senior notes.
Commencing with this report, we are required to provide management’s attestation on internal controls. The standards required for a public company under Section 404 of the Sarbanes-Oxley Act are significantly more stringent than those previously required of Holdings as a privately-held company.
Under the Sarbanes-Oxley Act of 2022, we are required to provide management’s attestation on internal controls. The standards required for a public company under Section 404 of the Sarbanes-Oxley Act are significantly more stringent than those previously required of Holdings as a privately-held company.
Our credit facility will contain restrictive covenants that may impair our ability to conduct business. Our credit facility contains operating covenants and financial covenants that may in each case limit management’s discretion with respect to certain business matters. We must comply with a maximum senior secured leverage ratio and a minimum debt service coverage ratio.
Our credit facility contains operating covenants and financial covenants that may in each case limit management’s discretion with respect to certain business matters. We must comply with a maximum senior secured leverage ratio and a minimum debt service coverage ratio.
On February 28, 2023, we amended our credit facility to transition from bearing interest based on LIBOR to SOFR. The future performance of SOFR cannot be predicted based on historical performance and the future level of SOFR may have little or no relation to historical levels of SOFR.
On February 28, 2023, we amended our credit facility to transition from bearing interest based on London Interbank Offered Rate (“LIBOR”) to SOFR. The future performance of SOFR cannot be predicted based on historical performance and the future level of SOFR may have little or no relation to historical levels of SOFR.
If our securities are delisted from Nasdaq, there could be significant material adverse consequences, including: • a limited availability of market quotations for our securities; • a limited amount of news and analyst coverage about the Company; and • a decreased ability to obtain capital or pursue acquisitions by issuing additional equity or convertible securities.
If our securities are delisted from the Nasdaq Global Market, there could be significant material adverse consequences, including: • a limited availability of market quotations for our securities; • a limited amount of news and analyst coverage about the Company; and • a decreased ability to obtain capital or pursue acquisitions by issuing additional equity or convertible securities. 39 We incur significant costs and obligations as a result of being a public company.
We expect these rules and regulations will increase our legal and financial costs and lead to a diversion of management time and attention from revenue-generating activities. 37 For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may remain an “emerging growth company” for up to five years from the consummation of our initial public offering or until such earlier time that we have $1.23 billion or more in annual revenues, have more than $700.0 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.
For as long as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies.” We may remain an “emerging growth company” for up to five years from the consummation of our initial public offering or until such earlier time that we have $1.23 billion or more in annual revenues, have more than $700.0 million in market value of our common stock held by non-affiliates, or issue more than $1.0 billion of non-convertible debt over a three-year period.
Item 1A. Risk Factors Summary of Risk Factors An investment in our securities involves substantial risk. The occurrence of one or more of the events or circumstances described in the section entitled “Risk Factors,” alone or in combination with other events or circumstances, may have a material adverse effect on our business, cash flows, financial condition and results of operations.
The occurrence of one or more of the events or circumstances described in the section entitled “Risk Factors,” alone or in combination with other events or circumstances, may have a material adverse effect on our business, cash flows, financial condition and results of operations.
We are dependent on certain distribution partners for distribution of our products and services. A loss of distribution partners could adversely affect our business. A small number of distribution partners currently deliver a significant percentage of our products and services to customers.
Any such event could adversely affect our business, financial condition and results of operations. We are dependent on certain distribution partners for distribution of our products and services. A loss of distribution partners could adversely affect our business. A small number of distribution partners currently deliver a significant percentage of our products and services to customers.
Accordingly, we may not achieve sales growth in the future and you should not consider our sales growth in fiscal 2022 as indicative of future performance.
We may not continue to achieve sales growth in the future and you should not consider our sales growth in fiscal 2023 as indicative of future performance.
Our ability to meet our customers’ high-quality standards in a timely manner is critical to our business success. If we are unable to provide our products and services at high quality and in a timely manner, our customer relationships may be adversely affected, which could result in the loss of customers.
If we are unable to provide our products and services at high quality and in a timely manner, our customer relationships may be adversely affected, which could result in the loss of customers.
If we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. ◦ A disruption in our operations or supply chain or the performance of our suppliers and/or development partners could adversely affect our business and financial results. ◦ We have limited experience in the digital assets industry and may not succeed in fully commercializing the products and solutions derived from the Arculus Platform. ◦ Digital asset wallet storage systems, such as the Arculus Cold Storage Wallet, are subject to risks related to a loss of funds due to theft of digital assets, security and cybersecurity risks, system failures and other operational issues, which could cause damage to our reputation and brand. ◦ Regulatory changes or actions may restrict the use of the Arculus Cold Storage Wallet or digital assets in a manner that adversely affects our business, prospects or operations. ◦ Production quality and manufacturing process disruptions could adversely affect our business. ◦ We are dependent on certain distribution partners for distribution of our products and services.
If we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected. ◦ A disruption in our operations or supply chain or the performance of our suppliers and/or development partners could adversely affect our business and financial results. ◦ We have limited experience in the digital assets industry and may not succeed in fully commercializing the products and solutions derived from the Arculus platform. ◦ Digital asset wallet storage systems, such as the Arculus Cold Storage Wallet, are subject to risks related to a loss of funds due to theft of digital assets, security and cybersecurity risks, system failures and other operational issues, which could cause damage to our reputation and brand. ◦ Regulatory changes or actions may restrict the use of the Arculus Cold Storage Wallet or digital assets in a manner that adversely affects our business, prospects or operations. ◦ Security markets, including the market for authentication solutions, are rapidly evolving to address increasing and challenging cyber threats, including identity theft, and the Company's Arculus Authenticate solutions may not achieve widespread market acceptance.
If we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such payment networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations.
If we are not able to produce cards for or provide services to any or all of the issuers issuing debit or credit cards on such payment networks, we could lose a substantial number of our customers, which could have a material adverse effect on our business, financial condition and results of operations. 32 As consumers and businesses spend less, our business, operation outcomes, and financial state may be adversely affected.
Our long-lived assets recorded as of December 31, 2022 were $31.6 million, representing approximately 18% of our total assets, of which we have recorded plant, equipment and leasehold improvements of $22.7 million, as our operations require significant investments in machinery and equipment.
Our long-lived assets recorded as of December 31, 2023 were $32.7 million, representing approximately 16% of our total assets, of which we have recorded plant, equipment and leasehold improvements of $25.2 million, as our operations require significant investments in machinery and equipment.
Our future growth may depend upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process. If we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected.
Any such production disruptions could adversely impact our business, financial condition and results of operations. Our future growth may depend upon our ability to develop, introduce, manufacture and commercialize new products, which can be a lengthy and complex process. If we are unable to introduce new products and services in a timely manner, our business could be materially adversely affected.
Any increases in the costs of goods and services for our business may also adversely affect our profit margins particularly if we are unable to achieve higher price increases or otherwise increase cost or operational efficiencies to offset the higher costs.
Any increases in the costs of goods and services for our business may also adversely affect our profit margins particularly if we are unable to achieve higher price increases or otherwise increase cost or operational efficiencies to offset the higher costs. Additionally, we partner with third-party partners to offer certain Arculus-related services to our customers.
Important factors and risks that could cause actual results to differ materially from those in the forward-looking statements include, among others, the following: • Risks Related to our Business ◦ The COVID-19 pandemic and the measures implemented to contain the spread of the virus have had a negative impact on our business and result of operations and, if continued, could be amplified and have a material adverse effect on our business, financial condition and results of operations. ◦ We may not be able to sustain our revenue growth rate in the future. 20 ◦ Failure to retain existing customers or identify and attract new customers could adversely affect our business, financial condition and results of operations. ◦ Data and security breaches could compromise our systems and confidential information, cause reputational and financial damage, and increase risks of litigation, which could adversely affect our business, financial condition and results of operations. ◦ System outages, data loss or other interruptions affecting our operations could adversely affect our business and reputation. ◦ Disruptions at our primary production facility may adversely affect our business, results of operations and/or financial condition. ◦ We may not be able to recruit, retain and develop qualified personnel, including for areas of newer specialized technology which could adversely affect our ability to grow our business. ◦ Our future growth may depend upon our ability to develop, introduce and commercialize new products, which can be a lengthy and complex process.
Important factors and risks that could cause actual results to differ materially from those in the forward-looking statements include, among others, the following: • Risks Related to our Business ◦ Rapidly evolving domestic and global economic conditions are beyond our control and could materially adversely affect our business, operations, and results of operations. ◦ Pandemics, or a resurgence of a pandemic such as COVID-19, may adversely affect our business, financial condition, liquidity or results of operations. ◦ We may not be able to sustain our revenue growth rate in the future. ◦ Failure to retain existing customers or identify and attract new customers could adversely affect our business, financial condition and results of operations. ◦ Data and security breaches could compromise our systems and confidential information, cause reputational and financial damage, and increase risks of litigation, which could adversely affect our business, financial condition and results of operations. ◦ System outages, data loss or other interruptions affecting our operations could adversely affect our business and reputation. ◦ Disruptions at our primary production facility may adversely affect our business, results of operations and/or financial condition. ◦ We may not be able to recruit, retain and develop qualified personnel, including for areas of newer specialized technology which could adversely affect our ability to grow our business. ◦ Our future growth may depend upon our ability to develop, introduce, manufacture, and commercialize new products, which can be a lengthy and complex process.
We may need to incur additional indebtedness to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise, and these obligations could have the effect of delaying, deferring, or preventing certain mergers, asset sales, other forms of business combinations, or other changes of control. 33 The acceleration of payments under the Tax Receivable Agreement in the case of certain changes of control may impair our ability to consummate change of control transactions or negatively impact the value received by owners of our Class A Common Stock.
We may need to incur additional indebtedness to finance payments under the Tax Receivable Agreement to the extent our cash resources are insufficient to meet our obligations under the Tax Receivable Agreement as a result of timing discrepancies or otherwise, and these obligations could have the effect of delaying, deferring, or preventing certain mergers, asset sales, other forms of business combinations, or other changes of control.
The exercise price for our Public Warrants and Resale Warrants is $11.50 per share, which exceeds the market price of our Class A Common Stock, which was $7.00 per share based on the closing price on March 8, 2023.
The exercise price for our Public Warrants is $11.50 per share, which exceeds the market price of our Class A Common Stock, which was $4.70 per share based on the closing price on March 04, 2024.
Regulatory uncertainty surrounding the digital asset Environment, and the regulatory classification of such digital assets As digital assets have grown in both popularity and market size, governments around the world have reacted differently to digital assets, with certain governments deeming them illegal and others allowing their use and trade under certain circumstances.
Regulatory changes or actions may restrict the use of the Arculus Cold Storage Wallet or digital assets in a manner that adversely affects our business, prospects or operations. 27 Regulatory uncertainty surrounding the digital asset Environment, and the regulatory classification of such digital assets As digital assets have grown in both popularity and market size, governments around the world have reacted differently to digital assets, with certain governments deeming them illegal and others allowing their use and trade under certain circumstances.
Our growth rate may slow in future periods due to a number of factors, which may include slowing demand for our products, increased competition, decreasing growth 22 of its overall market, or inability to engage and retain customers. If we are unable to maintain consistent sales or continue our sales growth, it may be difficult for us to maintain profitability.
It is also possible that our growth rate may slow in future periods due to a number of factors, which may include slowing demand for our products, increased competition, decreasing growth of its overall market, or inability to engage and retain customers.
Any patterns in market variable behaviors, such as correlations, may change in the future. Hypothetical or historical performance data are not indicative of, and have no bearing on, the potential performance of SOFR. The Company is not able to predict whether SOFR what the impact the transition to SOFR may be on the Company's financial condition and results of operations.
Any patterns in market variable behaviors, such as correlations, may change in the future. Hypothetical or historical performance data are not indicative of, and have no bearing on, the potential performance of SOFR.
In order to achieve successful technical execution of new products, we may need to undertake time-consuming and expensive research and development activities, which could negatively impact the servicing of our existing customers.
For example, we have historically focused on the payment card industry, but we are a new entrant into the digital assets industry. In order to achieve successful technical execution of new products, we may need to undertake time-consuming and expensive research and development activities, which could negatively impact the servicing of our existing customers.
As consumers and businesses spend less, our business, operation outcomes, and financial state may be adversely affected. Companies that rely heavily on consumer and business spending are exposed to changing economic conditions and are impacted by changes in consumer confidence, consumer spending, discretionary income levels or consumer purchasing habits.
Companies that rely heavily on consumer and business spending are exposed to changing economic conditions and are impacted by changes in consumer confidence, consumer spending, discretionary income levels or consumer purchasing habits.
If these third parties experience operational interference or disruptions, fail to perform their obligations and meet our expectations, experience a cybersecurity incident, fail to comply with applicable regulatory and/or licensing requirements which may evolve over time, or are subject to regulatory enforcement proceedings concerning their operations, the operations of the Arculus Cold Storage Wallet could be disrupted or otherwise adversely affected. 25 The COVID-19 pandemic and related government measures in response to the pandemic negatively affected our suppliers, which in turn negatively affected our production and business.
If any of these third parties experiences operational interference or disruptions, fails to perform its obligations and 26 meet our expectations, experiences a cybersecurity incident, fails to comply with applicable regulatory and/or licensing requirements which may evolve over time, or is subject to regulatory enforcement proceedings concerning their operations, the operations of the Arculus solutions could be disrupted or otherwise adversely affected.
Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect our business.
Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may become material and adversely affect our business. Risks Related to Our Business Rapidly evolving domestic and global economic conditions are beyond our control and could materially adversely affect our business, operations, and results of operations.
Our guarantees of indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations.
Our guarantees of indebtedness and liabilities could limit the cash flow available for our operations, expose us to risks that could adversely affect our business, financial condition and results of operations and impair our ability to satisfy our obligations. Holdings' notes are exchangeable into shares of our Class A Common Stock at an effective conversion price of $11.50 per share.
In particular, the rise in the adoption of wireless or mobile payment systems may make physical metal cards less attractive as a method of payment, which could result in less demand for these products.
Our product and service offerings could be rendered obsolete if we are unable to develop and introduce innovative products in a cost-effective and timely manner. In particular, the rise in the adoption of wireless or mobile payment systems may make physical metal cards less attractive as a method of payment, which could result in less demand for these products.
In addition, any such delays or deficiencies could result in our failure to meet the requirements for continued listing of our securities on Nasdaq. If our operating performance does not meet market expectations, the price of our securities may decline. Fluctuations in the price of our securities could contribute to the loss of all or part of your investment.
In addition, any such delays or deficiencies could result in our failure to meet the requirements for continued listing of our securities on the Nasdaq Global Market.

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Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 2. Properties 43 The Company maintains five (5) leased facilities, as set forth below. The Company believes its current facilities are suitable and adequate for its current and presently contemplated operations and production capacity needs and recognizes that future operations may require expanded and/or additional production capacity.
Biggest changeItem 2. Properties The Company maintains five (5) leased facilities, as set forth below. The Company believes its current facilities are suitable and adequate for its current and presently contemplated operations and production capacity needs and recognizes that future operations may require expanded and/or additional production capacity.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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Biggest changeItem 3. Legal Proceedings As of March 2023, the Company was not a party to, nor were any of its properties the subject of, any material pending legal proceedings, other than ordinary routine claims incidental to the business. Item 4. Mine Safety Disclosures Not applicable. 44 Part II
Biggest changeItem 3. Legal Proceedings As of March 2024, the Company was not a party to, nor were any of its properties the subject of, any material pending legal proceedings, other than ordinary routine claims incidental to the business. Item 4. Mine Safety Disclosures Not applicable. 47 Part II

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeSales of Unregistered Securities The shares of Class B Common Stock originally issued to Roman Sponsor, the Private Placement Warrants, the shares of Class B Common Stock issued in connection with the Business Combination and the shares of Class A Common Stock and the Company’s Exchangeable Notes issued pursuant to the Subscription Agreements in connection with the PIPE Investments were not registered under the Securities Act, and were issued in reliance on the exemption from registration requirements thereof provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering without any form of general solicitation or general advertising, or the involvement of any underwriters.
Biggest changeSales of Unregistered Securities 48 The shares of Class B Common Stock originally issued to Roman Sponsor prior to the Business Combination (for which the Company received an aggregate purchase price of $25,000), the Private Placement Warrants issued to Roman Sponsor prior to the Business Combination (for which the Company received a purchase price of $1.00 per Private Placement Warrant), the shares of new Class B Common Stock issued in connection with the Business Combination to the historical owners of Holdings (for which the Company did not receive any separate consideration) and the shares of Class A Common Stock and the Company’s Exchangeable Notes issued pursuant to the Subscription Agreements in connection with the PIPE Investments (for which the Company received gross proceeds of $45,000,000 and $130,000,000 respectively) were not registered under the Securities Act, and were issued in reliance on the exemption from registration requirements thereof provided by Section 4(a)(2) of the Securities Act and/or Regulation D promulgated thereunder as a transaction by an issuer not involving a public offering without any form of general solicitation or general advertising, or the involvement of any underwriters.
In accordance with the Holdings Second Amended and Restated LLC Agreement and the terms of the Exchange Agreement entered into in connection with the merger in December 2021, the Class B Units of Holdings 45 may each be exchanged at the option of the holder, together with a corresponding cancellation of the corresponding number of shares of Class B Common Stock of the Company, on a one-for-one basis for shares of Class A Common Stock of the Company.
In accordance with the Holdings Second Amended and Restated LLC Agreement and the terms of the Exchange Agreement entered into in connection with the merger in December 2021, the Class B Units of Holdings may each be exchanged at the option of the holder, together with a corresponding cancellation of the corresponding number of shares of Class B Common Stock of the Company, on a one-for-one basis for shares of Class A Common Stock of the Company.
Based on available information, we believe there are over 1,500 beneficial owners of our Class A Common Stock and over 300 holders of our Public Warrants. Dividend Policy We have not paid any cash dividends on Class A Common Stock to date.
Based on available information, we believe there are over 2,300 beneficial owners of our Class A Common Stock and over 300 holders of our Public Warrants. Dividend Policy and Securities Repurchase Program We have not paid any cash dividends on our Common Stock to date.
During the quarter ended December 31, 2022, the Company issued 261,743 shares of Class A Common Stock upon the exchange of the same number of Class B Units and the cancellation of the same number of shares of Class B Common Stock held by the exchanging stockholder. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable.
During the quarter ended March 31, 2023, the Company issued 366,635 shares of Class A Common Stock, respectively, upon the exchange of the same number of Class B Units and the cancellation of the same number of shares of Class B Common Stock held by the exchanging stockholder.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Our Class A Common Stock, units, and warrants were historically traded on Nasdaq under the symbols “DBDR,” “DBDRU” and “DBDRW,” respectively. In connection with the merger in December 2021, the units ceased to trade.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Market Information Since December 28, 2021, our Class A Common Stock and Public Warrants have been listed on the Nasdaq Global Market, under the symbols “CMPO” and “CMPOW,” respectively.
Holders As of March 8, 2023, there were six holders of record of Class A Common Stock, ten holders of record of Class B Common Stock, two holders of record of our Public Warrants and one holder of record of our Private Warrants.
Holders As of March 1, 2024, there were four holders of record of Class A Common Stock, nine holders of record of Class B Common Stock, and three holders of record of our Public Warrants.
The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any cash dividends will be within the discretion of our Board. Further, our ability to declare dividends will also be limited by restrictive covenants contained in our debt agreements.
In addition, the Board may from time to time consider whether or not to institute a dividend policy. The payment of cash dividends in the future will be dependent upon our revenues and earnings, if any, capital requirements and general financial condition. The payment of any cash dividends will be within the discretion of our Board.
Since December 28, 2021, our Class A Common Stock and Public Warrants have been listed on The Nasdaq Global Market, under the symbols “CMPO” and “CMPOW,” respectively. On March 8, 2023, the closing price of a share of Class A Common Stock was $7.00 and the closing price for our Public Warrants was $1.63.
On March 4, 2024, the closing price of a share of Class A Common Stock was $4.70 and the closing price for our Public Warrants was $0.21.
Removed
Our Board of Directors (the “Board”) may from time to time consider whether or not to institute a dividend policy. It is our present intention to retain any earnings for use in our business operations and accordingly, we do not anticipate the Board declaring any dividends in the foreseeable future.
Added
The Company has maintained a thoughtful approach to managing capital allocations focused on driving organic growth and reducing outstanding indebtedness, which has resulted on a long history of delivering profitable growth. Future allocations of capital may also include repurchases of our outstanding securities, as described below.
Removed
Under our Charter, holders of Class B Common Stock are not entitled to share in any declared dividends. Stock Performance Graph Not applicable.
Added
Further, our ability to declare dividends will be limited by restrictive covenants contained in our debt agreements. Under our Charter, dividends or other distributions declared on our Common Stock are payable from the Company to the holders of Class A Common Stock only.
Removed
The shares of Class B Common Stock originally issued to Roman Sponsor were issued for an aggregate purchase price of $25,000. The Private Placement Warrants were originally issued for a purchase price of $1.00 per Private Placement Warrant.
Added
Due to the Company's Up-C structure, the holders of Class B Common Stock typically would participate in such dividends or other distributions through distributions made on their corresponding number of LLC membership units in the Company's subsidiary, CompoSecure Holdings, L.L.C.
Removed
The Company did not receive any consideration in connection with the issuance of the Class B Common Stock issued in connection with the Business Combination. The Company issued the shares of Class A Common Stock and the Exchangeable Notes in the PIPE Investments for gross proceeds of $45,000,000 and $130,000,000, respectively.
Added
To provide a new mechanism to unlock investor value, in February 2024, an independent committee of our Board has approved a repurchase program for up to $40 million of our outstanding shares of common stock, warrants and/or notes exchangeable for shares of common stock. The repurchase program is effective March 7, 2024 through March 7, 2027.
Added
Repurchases under this program may be made from time to time in the open market, through privately negotiated transactions, tender offers, or otherwise, and will be made as permitted by the terms and conditions of our senior credit facility and indenture for its exchangeable notes, as applicable.
Added
Repurchases of common stock will be conducted in accordance with Rule 10b-18 of the Exchange Act.
Added
To facilitate equity repurchases, we expect to enter into a Rule 10b5-1 repurchase plan with a third-party broker to allow us to repurchase shares of our common stock at times when we otherwise might be prevented from doing so under insider trading laws or because of trading blackout periods imposed under our Insider Trading Policy.
Added
Any exchangeable note or warrant repurchases will be conducted in accordance with applicable insider trading laws and our Insider Trading Policy. Any shares of common stock repurchased under the program may either be returned to the status of authorized but unissued shares of common stock or held as treasury stock.
Added
Subject to applicable law, we may elect to amend or cancel the repurchase program or amend the terms thereof. Stock Performance Graph Not applicable.
Added
For clarity the shares of Class B Common Stock originally issued to Roman Sponsor (referenced above) were all converted to Class A Common Stock upon the completion of the Business Combination, and a new Class B Common Stock was created and issued in the Business Combination to the historical owners of Holdings.
Added
In addition, the Private Placement Warrants originally issued to Roman Sponsor (referenced above) have all been sold by Roman Sponsor since the Business Combination and, thereby, have become Public Warrants. At December 31, 2023, there were no longer any outstanding Private Placement Warrants.
Added
No Class B Units were tendered to the Company for exchange into shares of Class A Common Stock since the quarter ended March 31, 2023. Purchases of Equity Securities by the Issuer and Affiliated Purchasers Not applicable. See " Dividend Policy and Securities Repurchase Program " above. Item 6. Reserved

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changePlease see the factors discussed elsewhere in this annual report on Form 10-K, including those discussed in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for additional information. 48 Results of Operations Year Ended December 31, 2022 Compared with Year Ended December 31, 2021 The following table presents the Company’s results of operations for the periods indicated: Year Ended December 31, 2022 2021 $ Change % Change (in thousands) Net sales $ 378,476 $ 267,948 $ 110,528 41 % Cost of sales $ 158,832 $ 123,099 $ 35,733 29 % Gross profit 219,644 144,849 74,795 52 % Operating expenses: Selling, general and administrative expenses 104,749 63,424 $ 41,325 65 % Income from operations 114,895 81,425 33,470 41 % Other income, net $ 21,280 $ 1,132 $ 20,148 1780 % Income before income taxes 136,175 82,557 53,618 65 % Income tax (expense) benefit (4,360) 857 (5,217) (609 %) Net income 131,815 83,414 48,401 58 % Net income attributable to redeemable non-controlling interests (1) 113,158 80,260 32,898 41 % Net income attributable to CompoSecure, Inc (1) $ 18,657 $ 3,154 $ 15,503 492 % (1) Net income attributable to CompoSecure, Inc. for the year ended December 31, 2021 is equal to net income for the period subsequent to Business Combination for the prorated period from December 27, 2021 (the date of the Business Combination) through December 31, 2021.
Biggest changeYear Ended December 31, 2022 Compared with Year Ended December 31, 2021 The following table presents the Company’s results of operations for the periods indicated: Year Ended December 31, 2022 2021 $ Change % Change (in thousands) Net sales $ 378,476 $ 267,948 $ 110,528 41 % Cost of sales $ 158,832 $ 123,099 $ 35,733 29 % Gross profit 219,644 144,849 74,795 52 % Operating expenses: Selling, general and administrative expenses 104,749 63,424 41,325 65 % Income from operations 114,895 81,425 33,470 41 % Other income (expense), net $ 21,280 $ 1,132 $ 20,148 1780 % Income before income taxes 136,175 82,557 53,618 65 % Income tax benefit (4,360) 857 (5,217) (609 %) Net income 131,815 83,414 48,401 58 % Net income attributable to redeemable non-controlling interests 113,158 80,260 32,898 41 % Net income attributable to CompoSecure, Inc $ 18,657 $ 3,154 $ 15,503 492 % Year Ended December 31, 2022 2021 Gross Margin 58 % 54 % Operating margin 30 % 30 % Net Sales Year Ended December 31, 2022 2021 $ Change % Change (in thousands) Net sales by region: Domestic $ 295,423 $ 218,441 $ 76,982 35 % International 83,053 49,507 33,546 68 % Total $ 378,476 $ 267,948 $ 110,528 41 % The Company’s net sales for the year ended December 31, 2022 increased by $110.5 million, or 41%, to $378.5 million compared to $267.9 million for the year ended December 31, 2021.
On February 28, 2023, the Company amended its 2021 Credit Facility to, among other things, transition from bearing interest based on LIBOR to SOFR or the Alternate Base Rate (as defined in the 2021 Credit Facility), at the election of the Company, plus an applicable margin, and to reflect the waiver of a technical default under the 2021 Credit Facility, related to the delayed delivery of a pledge of its interests in Holdings by the parent Company i.e., CompoSecure, Inc.
On February 28, 2023, the Company amended the 2021 Credit Facility to, among other things, to transition from bearing interest based on LIBOR to SOFR or the Alternate Base Rate (as defined in the 2021 Credit Facility), at the election of the Company, plus an applicable margin, and to reflect the waiver of a technical default under the 2021 Credit Facility, related to the delayed delivery of a pledge of its interests in Holdings by the parent company (i.e., CompoSecure, Inc.).
Overview The Company creates innovative, highly differentiated and customized quality financial payment card products to support and increase its customer acquisition, customer retention and organic customer spend. The Company’s customers consist primarily of leading international and domestic banks and other payment card issuers primarily within the United States (“U.S.”), Europe, Asia, Latin America, Canada, and the Middle East.
Overview The Company creates innovative, highly differentiated and customized quality financial payment card products to support and increase its customer acquisition, customer retention and organic customer spend. The Company’s customers consist primarily of leading international and domestic banks and other payment card issuers 49 primarily within the United States (“U.S.”), Europe, Asia, Latin America, Canada, and the Middle East.
Upon the transaction date, a valuation was performed which took into consideration all the key terms and conditions of the award, including the fact that, under Topic 718, there is no requisite service period due to the fact that there is no 57 service condition prospectively, and as of the grant date there was no service inception date preceding the grant date on which to base historical valuation or expense amortization.
Upon the transaction date, a valuation was performed which took into consideration all the key terms and conditions of the award, including the fact that, under Topic 718, there is no requisite service period due to the fact that there is no service condition prospectively, and as of the grant date there was no service inception date preceding the grant date on which to base historical valuation or expense amortization.
Operating Expenses The Company’s operating expenses primarily comprised selling, general, and administrative expenses, which generally consist of personnel-related expenses for its corporate, executive, finance, information technology, research and development and other administrative function, and expenses for outside professional services, 47 including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing.
Operating Expenses The Company’s operating expenses primarily comprised selling, general, and administrative expenses, which generally consist of personnel-related expenses for its corporate, executive, finance, information technology, research and development and other administrative function, and expenses for outside professional services, including legal, audit and accounting services, as well as expenses for facilities, depreciation, amortization, travel, sales and marketing.
Liquidity and Capital Resources 60 The Company’s primary sources of liquidity are its existing cash and cash equivalents balances, cash flows from operations and borrowings on its term loan revolving credit facility and exchangeable notes. The Company’s primary cash requirements include operating expenses, debt service payments (principal and interest), and capital expenditures (including property and equipment).
Liquidity and Capital Resources The Company’s primary sources of liquidity are its existing cash and cash equivalents balances, cash flows from operations and borrowings on its term loan revolving credit facility and exchangeable notes. The Company’s primary cash requirements include operating expenses, debt service payments (principal and interest), and capital expenditures (including property and equipment).
This was partially offset by a decrease in marketing expenses of $5.6 million. Income from Operations and Operating Margin 50 During the year ended December 31, 2022, the Company had income from operations of $114.9 million compared to income from operations of $81.4 million for the year ended December 31, 2021.
This was partially offset by a decrease in marketing expenses of $5.6 million. Income from Operations and Operating Margin During the year ended December 31, 2022, the Company had income from operations of $114.9 million compared to income from operations of $81.4 million for the year ended December 31, 2021.
The Company does not expect any material impact to the financial results due to settlement of this audit. 59 Holdings is a partnership for tax purposes. Pursuant to Holdings’ limited liability company agreement, Holdings makes pro rata tax distributions during each year to the members of Holdings.
The Company does not expect any material impact to the financial results due to settlement of this audit. Holdings is a partnership for tax purposes. Pursuant to Holdings’ limited liability company agreement, Holdings makes pro rata tax distributions during each year to the members of Holdings.
The Public Warrants were valued using the quoted market price as the fair value at the end of each balance sheet date. See Note 12 in Notes to Consolidated Financial Statements in this Form 10-K for additional information.
The Public Warrants were valued using the quoted market price as the fair value at the 60 end of each balance sheet date. See Note 12 in Notes to Consolidated Financial Statements in this Form 10-K for additional information.
This was primarily driven by higher demand for the Company's products in the year ended December 31, 2022 due to higher overall customer acquisition by the Company’s clients as we continue to emerge from the adverse impact of the COVID-19 pandemic.
This was primarily driven by 54 higher demand for the Company's products in the year ended December 31, 2022 due to higher overall customer acquisition by the Company’s clients as we continue to emerge from the adverse impact of the COVID-19 pandemic.
Derivative Liability – Redemption Make-Whole Provision Feature 58 A derivative liability was initially recorded as a result of the issuance of the 7.00% Exchangeable notes due December, 2026 (see Note 7 in Notes to Consolidated Financial Statements in this Form 10-K).
Derivative Liability – Redemption Make-Whole Provision Feature A derivative liability was initially recorded as a result of the issuance of the 7.00% Exchangeable notes due December, 2026 (see Note 7 in Notes to Consolidated Financial Statements in this Form 10-K).
The following assumptions were used to determine the grant date fair value for the Earnouts that were fully expensed at the closing date, December 27, 2021: Year Ended 12/27/2021 Valuation date share price $ 9.95 Risk-free interest rate 0.98% - 1.12% Expected volatility 57.92% - 58.88% Expected dividends 0 % Expected forfeiture rate 0 % Expected term 3 - 4 years A 10% change in the Company’s equity-based compensation expense for the year ended December 31, 2022 would have affected net income by approximately $1.0 million.
The following assumptions were used to determine the grant date fair value for the Earnouts that were fully expensed at the closing date, December 27, 2021: Year Ended 12/27/2021 Valuation date share price $ 9.95 Risk-free interest rate 0.98% - 1.12% Expected volatility 57.92% - 58.88% Expected dividends 0 % Expected forfeiture rate 0 % Expected term 3 - 4 years A 10% change in the Company’s equity-based compensation expense for the year ended December 31, 2022 and 2023 would have affected net income by approximately $1.0 million.
The increase in net sales was due to a 35% increase in domestic sales and a 68% increase in international sales. 49 Domestic: The Company’s domestic net sales for the year ended December 31, 2022 increased $77.0 million, or 35%, to $295.4 million compared to $218.4 million for the year ended December 31, 2021.
The increase in net sales was due to a 35% increase in domestic sales and a 68% increase in international sales. Domestic: The Company’s domestic net sales for the year ended December 31, 2022 increased $77.0 million, or 35%, to $295.4 million compared to $218.4 million for the year ended December 31, 2021.
Significant areas requiring management to make estimates include the valuation of equity instruments, measurement of changes in the fair value of earnout consideration liability, estimates of derivative 55 liability associated with the exchangeable notes which are marked to market each quarter based on a Lattice model approach, changes in the fair value of warrant liabilities, derivative asset for the interest rate swap, valuation allowances on deferred tax assets which are based on an assessment of recoverability of the deferred tax assets against future taxable income and estimates of the inputs used to calculate the tax receivable agreement liability.
Significant areas requiring management to make estimates include the valuation of equity 57 instruments, measurement of changes in the fair value of earnout consideration liability, estimates of derivative liability associated with the exchangeable notes which are marked to market each quarter based on a Lattice model approach, changes in the fair value of warrant liabilities, derivative asset for the interest rate swap, valuation allowances on deferred tax assets which are based on an assessment of recoverability of the deferred tax assets against future taxable income and estimates of the inputs used to calculate the tax receivable agreement liability.
Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, and promotional activity. Gross Profit and Gross Margin The Company’s gross profit represents its net sales less cost of sales, and its gross margin represents gross profit as a percentage of its net sales.
Cost of sales can be impacted by many factors, including volume, operational efficiencies, procurement costs, and promotional activity. Gross Profit and Gross Margin 50 The Company’s gross profit represents its net sales less cost of sales, and its gross margin represents gross profit as a percentage of its net sales.
Most returned goods are re-worked and subsequently re-shipped to the customer and recognized as revenue. Historically, returns have not been material to the Company. 56 Additionally, the Company has a rebate program with certain customers allowing for rebates based on achieving a certain level of shipped sales during the calendar year.
Most returned 58 goods are re-worked and subsequently re-shipped to the customer and recognized as revenue. Historically, returns have not been material to the Company. Additionally, the Company has a rebate program with certain customers allowing for rebates based on achieving a certain level of shipped sales during the calendar year.
Additional interest may be payable as set forth in the Indenture. The Exchangeable Notes will mature in five years on December 27, 2026, and be convertible into shares of Class A common stock at a conversion price of $11.50 per share.
Additional interest may be payable as set forth in the Indenture. The Exchangeable Notes will mature in five years on December 15, 2026, and be convertible into shares of Class A common stock at a conversion price of $11.50 per share.
The Company’s operating margin for the year ended December 31, 2022 remained consistent at 30% compared to the year ended December 31, 2021. Other Income (Expenses) (net) Interest expense for the year ended December 31, 2022 increased $10.6 million, or 47.1%, to $22.5 million compared to $11.9 million for the year ended December 31, 2021.
The Company’s operating margin for the year ended December 31, 2022 remained consistent at 30% compared to the year ended December 31, 2021. Other Expenses Interest expense for the year ended December 31, 2022 increased $10.6 million, or 47.1%, to $22.5 million compared to $11.9 million for the year ended December 31, 2021.
The following unaudited table presents the reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2022, 2021 and 2020.
The following unaudited table presents the reconciliation of net income to EBITDA and Adjusted EBITDA for the years ended December 31, 2023, 2022 and 2021.
As of December 31, 2022, the Company had inventory-related purchase commitments totaling approximately $60.0 million. Financing The Company is party to the 2021 Credit Facility with various banks and an issuer of Exchangeable Notes to certain holders.
As of December 31, 2023, the Company had inventory-related purchase commitments totaling approximately $36.0 million. Financing The Company is party to the 2021 Credit Facility with various banks and an issuer of Exchangeable Notes to certain holders.
Although the Company has no specific current plans to do so, if the Company decides to pursue one or more significant acquisitions, it may incur additional debt to finance such acquisitions. At December 31, 2022, the Company had $233.1 million of total debt outstanding under the Company’s existing credit facility, (the “2021 Credit Facility”).
Although the Company has no specific current plans to do so, if the Company decides to pursue one or more significant acquisitions, it may incur additional debt to finance such acquisitions. At December 31, 2023, the Company had $210.3 million of total debt outstanding under the Company’s existing credit facility, (the “2021 Credit Facility”).
As of December 31, 2022, the Company’s net leverage ratio met the requirement for the available borrowing as defined in the terms of the 2021 Credit Facility. The 2021 Credit Facility will mature on December 21, 2025.
As of December 31, 2023, the Company’s net leverage ratio met the requirement for the available borrowing as defined in the terms of the 2021 Credit Facility. The 2021 Credit Facility will mature on December 16, 2025.
The following unaudited table presents the non-GAAP earnings per share and reconciliation of GAAP net income to non-GAAP adjusted net income for the periods indicated: 54 Year Ended December 31, 2022 (in thousands) except per share amounts Basic Diluted Net Income $ 131,815 $ 131,815 Add: provision for income taxes 4,360 4,360 Income before income taxes 136,175 136,175 Income tax expense (1) (22,423) (22,423) Adjusted net income 113,752 113,752 Less: mark-to-market adjustments (2) (42,267) (42,267) Add: stock-based compensation 11,465 11,465 Adjusted net income $ 82,950 $ 82,950 Common shares outstanding used in computing net income per share, basic: Class A and Class B common shares (3) 75,697 75,697 Common shares outstanding used in computing net income per share, diluted: Warrants (Public and Private) (4) — 8,094 Equity awards — 4,183 Total Shares outstanding used in computing net income per share 75,697 87,974 Adjusted net income per share (5) $ 1.10 $ 0.94 1) Calculated using the Company's blended tax rate. 2) Includes the changes in fair value of warrant liability and earnout consideration liability. 3) Assumes both Class A and Class B shares participate in earnings and are outstanding at the end of the period. 4) Assumes treasury stock method, valuation at assumed fair market value of $18.00. 5) The Company did not include the effect of Exchangeable Notes to its total shares outstanding used in diluted adjusted net income per share.
The following unaudited table presents the non-GAAP earnings per share and reconciliation of GAAP net income to non-GAAP adjusted net income for the periods indicated below: 56 Year Ended December 31, 2023 2022 (in thousands) except per share amounts Basic and Diluted: Net Income $ 112,520 $ 131,815 Add: provision for income taxes 4,556 4,360 Income before income taxes 117,076 136,175 Income tax expense (1) (24,403) (22,423) Adjusted net income 92,673 113,752 Less: mark-to-market adjustments (2) (22,284) (42,267) Add: stock-based compensation 17,562 11,465 Adjusted net income $ 87,951 $ 82,950 Common shares outstanding used in computing net income per share, basic: Class A and Class B common shares (3) 78,619 75,697 Common shares outstanding used in computing net income per share, diluted: Warrants (Public and Private) (4) 8,094 8,094 Equity awards 3,651 4,183 Total Shares outstanding used in computing net income per share -diluted 90,364 87,974 Adjusted net income per share -basic $ 1.12 $ 1.10 Adjusted net income per share -diluted $ 0.97 $ 0.94 1) Calculated using the Company's blended tax rate. 2) Includes the changes in fair value of warrant liability and earnout consideration liability. 3) Assumes both Class A and Class B shares participate in earnings and are outstanding at the end of the period. 4) Assumes treasury stock method, valuation at assumed fair market value of $18.00. 5) The Company did not include the effect of Exchangeable Notes to its total shares outstanding used in diluted adjusted net income per share.
Net Cash Provided by Operations Cash provided by the Company’s operating activities for the year ended December 31, 2022 was $92.8 million compared to cash provided by its operating activities of $77.8 million during the year ended December 31, 2021.
Net Cash Provided by Operations Cash provided by the Company’s operating activities for the year ended December 31, 2023 was $104.3 million compared to cash provided by its operating activities of $92.8 million during the year ended December 31, 2022.
The Company made an excess cash flow payment of $13.8 million in the year ended December 31, 2022 per the terms of the 2021 Credit Facility. The Company was in compliance with all financial covenants under the 2021 Credit Facility as of December 31, 2022.
The Company made a prepayment of $4.1 million and an excess cash flow payment of $13.8 million in the year ended December 31, 2023 and December 31, 2022, respectively, per the terms of the 2021 Credit Facility. The Company was in compliance with all financial covenants under the 2021 Credit Facility as of December 31, 2023.
The Company recorded $26,842.0 million and $24.5 million in tax receivable agreement liability as of December 31, 2022 and 2021, respectively which is recorded in the Company's consolidated balance sheets.
The Company recorded $25.4 million, $26.8 million and $24.5 million in tax receivable agreement liability as of December 31, 2023, 2022 and 2021, respectively which is recorded in the Company's consolidated balance sheets.
After the amendment on February 28, 2023, the interest rate spreads and fees under the 2021 Credit Facility will be based on a quoted SOFR plus an applicable margin ranging from 2.0% to 3.0% for the revolving and term loan Term Benchmark and RFR Spread debt (as each term is defined in the 2021 Credit Facility).
After the amendment on February 28, 2023, the interest rate spreads and fees under the 2021 63 Credit Facility are based on a quoted SOFR plus a SOFR adjustment of 0.10% and an applicable margin ranging from 1.75% to 2.75% for the revolving and term loan Term Benchmark and RFR Spread debt (as each term is defined in the 2021 Credit Facility).
Net Cash Used in Investing Cash used in the Company’s investing activities for the year ended December 31, 2022 was $9.1 million, primarily relating to capital expenditures, compared to cash used in investing activities of $4.7 million for the year ended December 31, 2021.
Net Cash Used in Investing 64 Cash used in the Company’s investing activities for the year ended December 31, 2023 was $10.9 million, primarily relating to capital expenditures, compared to cash used in investing activities of $9.1 million for the year ended December 31, 2022.
See Note 1 and Note 15 in Notes to Consolidated Financial Statements in this Form 10-K.
See Note 10 in Notes to Consolidated Financial Statements in this Form 10-K.
The increase was primarily due to favorable change in fair value of $3.5 million in warrant liability and $9.6 million in earnout consideration liability and a more profitable product mix, partially offset by increases in operating expenses as a result of higher sales volume and costs related to the launch of Arculus. 53 Use of Non-GAAP Financial Measures This Form 10-K includes certain non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and that may be different from non-GAAP financial measures used by other companies.
The increase was primarily driven by higher sales volume, a more profitable sales mix, favorable change in fair value of earnout consideration liability of $23.3 million and favorable change in fair value of $18.9 million in warrant liability, partially offset primarily by increases in operating expenses as a result of higher sales volume and arbitration charges of $10.2 million. 55 Use of Non-GAAP Financial Measures This Form 10-K includes certain non-GAAP financial measures that are not prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and that may be different from non-GAAP financial measures used by other companies.
The Company must also pay an annual commitment fee of 0.40% on the unused portion of the $60.0 million revolving loan commitment. As of December 31, 2022, the effective interest rate on the Company’s 2021 Credit Facility was 5.15%.
The Company must also pay an annual commitment fee of 0.35% on the unused portion of the $60.0 million revolving loan commitment. As of December 31, 2023, the effective interest rate on the Company’s 2021 Credit Facility was 7.80%.
The Alternate Base Rate margin under the old LIBOR rate before the transition would have been ranging from 2.00% to 3.00% for each such portion of debt. 61 On April 19, 2021, concurrently with the execution of the Merger Agreement, the Company and its wholly owned subsidiary, Holdings entered into subscription agreements (the “Note Subscription Agreements”) with certain investors ("Notes Investors") pursuant to which such Notes investors, severally and not jointly, purchased on the Closing Date of the Business Combination, senior notes (the “Exchangeable Notes”) issued by the Company and guaranteed by the Company's wholly owned subsidiary, Holdings in an aggregate principal amount of up to $130.0 million that are exchangeable into shares of Class A common stock at a conversion price of $11.50 per share, subject to the terms and conditions of an Indenture entered by the Company and its wholly owned subsidiary, Holdings and the trustee under the Indenture.
On April 19, 2021, concurrently with the execution of the Merger Agreement, the Company and its wholly owned subsidiary, Holdings entered into subscription agreements (the “Note Subscription Agreements”) with certain investors ("Notes Investors") pursuant to which such Notes investors, severally and not jointly, purchased on the Closing Date of the Business Combination, senior notes (the “Exchangeable Notes”) issued by the Company and guaranteed by the Company's wholly owned subsidiary, Holdings in an aggregate principal amount of up to $130.0 million that are exchangeable into shares of Class A common stock at a conversion price of $11.50 per share, subject to the terms and conditions of an Indenture entered by the Company and its wholly owned subsidiary, Holdings and the trustee under the Indenture.
Net Cash Used in Financing Cash used in the Company’s financing activities for the year ended December 31, 2022 was $92.0 million, compared to cash used in the Company's financing activities for the year ended December 31, 2021 of $64.5 million.
Net Cash Used in Financing Cash used in the Company’s financing activities for the year ended December 31, 2023 was $65.8 million, compared to cash used in the Company's financing activities for the year ended December 31, 2022 of $92.0 million.
In connection with the consummation of the Business Combination, the then existing equity holders had the right to receive an aggregate of up to 7,500,000 additional (i) shares of the Company's class A common stock or (ii) Holdings' Units (and a corresponding number of shares of the Company's class B common stock), as applicable, in earn-out consideration based on the achievement of certain stock price thresholds (collectively, the “Earnouts”).
In connection with the consummation of the Business Combination, the then existing equity holders had the right to receive an aggregate of up to 7,500,000 additional (i) shares of the Company's class A common stock or (ii) Holdings' Units (and a corresponding number of shares of the Company's class B common stock), as applicable, in earn-out consideration based on the achievement of certain stock price thresholds (collectively, the “Earnouts”). 59 There were a total of 657,160 shares subject to ASC 718, or 328,580 shares for each portion of the Earnouts.
The increase in cash provided by operating activities of $15.0 million was primarily attributable to an increase in net income of $48.4 million, equity compensation expense of $11.5 million, amortization of deferred financing costs of $2.3 million, depreciation and amortization expense of $8.6 million, inventory reserve of $1.7 million and deferred tax expense of $3.2 million.
The increase in cash provided by operating activities of $11.5 million was primarily attributable to equity compensation expense of $17.6 million, depreciation and amortization expense of $8.4 million, amortization of deferred financing costs of $1.5 million and deferred tax expense of $2.7 million.
The risk-free rate reflects the U.S. Treasury yield curve for a similar expected life instrument in effect at the time of the grant. There were no option grants made during 2022 under 2015 incentive plans. The Company made certain grants under 2021 incentive plan during 2022. See Note 10 in Notes to Consolidated Financial Statements in this Form 10-K.
The risk-free rate reflects the U.S. Treasury yield curve for a similar expected life instrument in effect at the time of the grant. There were no option grants made during 2022 under 2015 incentive plans. The Company made certain grants under 2021 incentive plan during 2023 and 2022.
The Company is currently under audit by federal tax authorities for fiscal 2020. There have been no proposed adjustments at this stage of the examination. The examination is expected to be finalized by the end of fiscal 2023.
Federal, state and local income tax returns for years prior to 2019 are no longer subject to examination by tax authorities. The Company is currently under audit by federal tax authorities for fiscal 2020. There have been no proposed adjustments at this stage of the examination. The examination is expected to be finalized by the end of fiscal 2023.
The credit facility comprised a term loan of $250.0 million (with an outstanding balance of $233.1 at December 31, 2022) as well as a $60.0 million revolving loan facility, of which $60.0 million was available for borrowing as of December 31, 2022.
The credit facility comprised a term loan of $250.0 million as well as a $60.0 million revolving loan facility, of which $60.0 million was available for borrowing as of December 31, 2023.
As of December 31, 2022, the Company had cash and cash equivalents of $13.6 million and total debt principal outstanding of $363.1 million. The Company believes that cash flows from its operations and available cash and cash equivalents are sufficient to meet its liquidity needs, including the repayment of its outstanding debt, for at least the next 12 months.
The Company believes that cash flows from its operations and available cash and cash equivalents are sufficient to meet its liquidity needs, including the repayment of its outstanding debt, for at least the next 12 months.
The Company has established a niche position in the financial payment card market through nearly over 20 years of innovation and experience and is focused primarily on this attractive subsector of the financial technology market.
The Company has established a niche position in the financial payment card market through over 20 years of innovation and experience and is focused primarily on this attractive subsector of the financial technology market. The Company serves a diverse set of direct customers and indirect customers, including some of the largest issuers of credit cards in the U.S.
The extent to which the COVID-19 pandemic will continue to affect the Company’s business, financial condition, liquidity and the Company’s operating results will depend on future developments, which are highly uncertain and cannot be predicted. 46 Economic Conditions - globally and in the digital asset marketplace U.S. and international markets and, in particular, the rapidly evolving digital assets industry, are experiencing uncertain and volatile economic conditions, including from the impacts of the COVID-19 pandemic, Russian aggression in Ukraine, sustained inflation, threats or concerns of recession, and supply chain disruptions.
Economic Conditions - globally and in the digital asset marketplace U.S. and international markets and, in particular, the rapidly evolving digital assets industry, are experiencing uncertain and volatile economic conditions, including from the impacts of the COVID-19 pandemic, Russian aggression in Ukraine, sustained inflation, threats or concerns of recession, and supply chain disruptions.
The Company paid $0.1 million in the year ended December 31, 2022 to holders of interests in Holdings pursuant to the savings in U.S. federal, state and local income taxes that the Company realized as a result of the utilization of certain tax attributes for the fiscal year 2021 Income Taxes Income taxes are applied to the income attributable to the controlling interest (see Note 9 in Notes to Consolidated Financial Statements in this Form 10-K) as the income attributable to the non-controlling interest is pass-through income.
The Company paid $2.4 million and $0.1 million in the year ended December 31, 2023 and December 31, 2022 to holders of interests in Holdings pursuant to the savings in U.S. federal, state and local income taxes that the Company realized as a result of the utilization of certain tax attributes for the fiscal year 2022 and 2021.
In addition, the following table presents the Company’s net sales for the three months ended December 31, 2022 compared to December 31, 2021: Three Months Ended December 31, 2022 December 31, 2021 $ Change % Change (in thousands) Net Sales $ 93,790 $ 75,300 $ 18,490 25 % The Company’s net sales for the three months ended December 31, 2022 increased $18.5 million, or 25%, to $93.8 million compared to $75.3 million for the three months ended December 31, 2021.
In addition, the following table presents the Company’s net sales for the three months ended December 31, 2023 compared to December 31, 2022: Three Months Ended December 31, 2023 December 31, 2022 $ Change % Change (in thousands) Net Sales $ 99,900 $ 93,790 $ 6,110 7 % The Company’s net sales for the three months ended December 31, 2023 increased $6.1 million, or 7%, to $99.9 million compared to $93.8 million for the three months ended December 31, 2022.
The Company was not subject to income taxes prior to December 27, 2021, the date of the consummation of the Business Combination, due to the then equity structure of the Company and was subject to pass through income taxes. Federal, state and local income tax returns for years prior to 2019 are no longer subject to examination by tax authorities.
The Company was not subject to income taxes prior to December 27, 2021, the date of the consummation of the Business Combination, due to the then equity structure of the Company and was subject to pass through 61 income taxes.
Year Ended December 31, 2022 2021 2020 (in thousands) Net income $ 131,815 $ 83,414 $ 77,815 Add: Depreciation 8,575 10,428 9,916 Taxes 4,360 (857) — Interest expense, net 22,544 11,928 6,143 EBITDA $ 167,294 $ 104,913 $ 93,874 Special management bonus expense — 4,384 15,708 Equity compensation expense 11,465 6,113 1,848 Mark to market adjustments (1) (42,533) (13,060) — Other (2) — — 4,071 Adjusted EBITDA $ 136,226 $ 102,350 $ 115,501 (1) Includes the changes in fair value of warrant liability, derivative liabilities and earnout consideration liability for the year ended December 31, 2022 and December 31, 2021 .
Year Ended December 31, 2023 2022 2021 (in thousands) Net income $ 112,520 $ 131,815 $ 83,414 Add: Depreciation 8,387 8,575 10,428 Taxes 4,556 4,360 (857) Interest expense, net (1) 24,156 22,544 11,928 EBITDA $ 149,619 $ 167,294 $ 104,913 Special management bonus expense — — 4,384 Equity compensation expense 17,562 11,465 6,113 Mark to market adjustments (2) (22,145) (42,533) (13,060) Adjusted EBITDA $ 145,036 $ 136,226 $ 102,350 (1) Includes amortization of deferred financing costs for the years ended December 31, 2023, December 31, 2022 and December 31, 2021.
Cash used in financing activities for the year ended December 31, 2022 primarily related to payment of issuance costs related to the Business Combination of $23.8 million, repayment of scheduled and excess cash flow principal payments on the term loan of $16.9 million, principal payment on the line of credit of $15.0 million, and tax distributions to non-controlling interest holders of $36.3 million.
Cash used for the year ended December 31, 2022 primarily related to payment of issuance costs related to the Business Combination, repayment of scheduled term loan principal payments, repayment of cash withdrawn under the line of credit under the 2021 Credit Facility, and distributions to non-controlling interest.
Since there is no future substantive risk of forfeiture, all expense associated with the awards were accelerated and recognized on December 27, 2021.The valuation of the Earnouts was determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award.
The valuation of the Earnouts was determined using a Monte Carlo simulation model that utilizes significant assumptions, including volatility, that determine the probability of satisfying the market condition stipulated in the award to calculate the fair value of the award.
This was partially offset by changes in mark to market fair value net changes of $42.5 million and changes in working capital of $23.7 million.
This was partially offset by a decrease in net income of $112.5 million, changes in mark to market fair value net changes of $22.1 million, changes in working capital of $15.0 million and inventory reserve of $1.2 million.
Contractual Obligations The following table summarizes, as of December 31, 2022, the Company’s material expected contractual cash obligations by future period (see Notes 7, 8 and 16 of Notes to Consolidated Financial Statements): 62 Payments due by Period 1 year or less Years 2-3 Years 4-5 After Year 5 Total ($ amounts in thousands) Long-term Debt (1) $ 14,372 $ 218,750 $ 130,000 $ — $ 363,122 Operating Leases (2) 2,149 4,322 2,794 1,205 10,470 Tax Receivable Agreement Liability (3) 2,367 2,848 3,005 17,162 25,382 Total $ 18,888 $ 225,920 $ 135,799 $ 18,367 $ 398,974 (1) Includes principal only.
Contractual Obligations The following table summarizes, as of December 31, 2023, the Company’s material expected contractual cash obligations by future period (see Notes 7, 8 and 16 of Notes to Consolidated Financial Statements): Payments due by Period 1 year or less Years 2-3 Years 4-5 After Year 5 Total ($ amounts in thousands) Long-term Debt (1) $ 10,313 $ 330,000 $ — $ — $ 340,313 Operating Leases (2) 2,421 4,742 1,758 359 9,280 Tax Receivable Agreement Liability (3) 1,425 2,997 3,112 17,840 25,374 Total $ 14,159 $ 337,739 $ 4,870 $ 18,199 $ 374,967 (1) Includes principal only.
As such, the award was considered to be immediately vested from a service perspective, and is solely contingent on meeting the hurdles required for the award to be settled.
As such, the award was considered to be immediately vested from a service perspective, and is solely contingent on meeting the hurdles required for the award to be settled. Since there is no future substantive risk of forfeiture, all expense associated with the awards were accelerated and recognized on December 27, 2021.
Gross Profit and Gross Margin The Company’s gross profit for the year ended December 31, 2021 increased $12.2 million, or 9%, to $144.8 million compared to $132.6 million for the year ended December 31, 2020, while the gross profit margin increased from 51% to 54%.
Gross Profit and Gross Margin The Company’s gross profit for the year ended December 31, 2023 decreased $10.6 million, or 5%, to $209.1 million compared to $219.7 million for the year ended December 31, 2022, while the gross profit margin decreased from 58% to 54%.
Other Expenses Interest expense for the year ended December 31, 2021 increased $5.8 million, or 94%, to $11.9 million compared to $6.1 million for the year ended December 31, 2020.
The Company’s operating margin for the year ended December 31, 2023 remained consistent, at 30%, with the year ended December 31, 2022. Other Income (Expenses) (net) Interest expense for the year ended December 31, 2023 increased $1.6 million, or 7%, to $24.2 million compared to $22.5 million for the year ended December 31, 2022.
The ASU is effective for the Company for fiscal years beginning after December 15, 2022, and interim periods within those fiscal years with early adoption permitted. The Company adopted this guidance effective January 1, 2022. The adoption of this guidance did not have a material impact on the consolidated financial statements.
The amendments in ASU 2020-04 are effective for years beginning after December 15, 2022 for entities that have adopted current expected credit loss ("CECL") model under ASC 326. The Company adopted the CECL model effective January 1, 2022. The adoption of this ASU did not have any impact on the Company's financial statements.
See Liquidity and Capital Resources below for more detail on the existing debt facility. 52 Net Income The Company’s net income for the year ended December 31, 2021 was $83.4 million, compared to net income of $77.8 million for the year ended December 31, 2020.
An interest rate swap which the Company entered in January 2022 provided a benefit of $4.9 million for the year ended December 31, 2023. See Liquidity and Capital Resources below for more detail on the existing credit facility.
Income from Operations and Operating Margin During the year ended December 31, 2021, the Company had income from operations of $81.4 million compared to income of $84.0 million for the year ended December 31, 2020. The Company’s operating margin for the year ended December 31, 2021 decreased from 32% to 30% for the year ended December 31, 2020.
This was partially offset by increases in stock based compensation of $6.1 million and increases in salaries and employee benefits of $3.5 million. Income from Operations and Operating Margin During the year ended December 31, 2023, the Company had income from operations of $119.1 million compared to income from operations of $114.9 million for the year ended December 31, 2022.
International: The Company’s international net sales for the year ended December 31, 2021 increased $2.9 million, or 6%, to $49.5 million compared to $46.6 million for the year ended December 31, 2020. This was primarily driven by our efforts to grow our international distributor channels compared to the year ended December 31, 2020.
The increase was primarily due to higher customer acquisition by the Company’s clients as they continued to experience higher demand. International: The Company’s international net sales for the year ended December 31, 2023 decreased $13.9 million, or 17%, to $69.2 million compared to $83.1 million for the year ended December 31, 2022.
This was primarily due to increases in bonuses and commissions of $4.8 million and marketing and professional fee expenses of $19.0 million primarily related to the launch of Arculus in third quarter of 2021 and an overall increase in other costs of $1.1 million, partially offset by a decrease in transaction costs of approximately $10.0 million.
The decrease was driven primarily by a decrease in bonus expenses of $2.7 million, commission expenses of $8.1 million, reductions in marketing expenses of $7.2 million, insurance expenses of $4.2 million and professional fees of $0.5 million, as well as an decrease in various other costs aggregating $1.6 million.
Removed
The Company serves a diverse set of over 20 direct customers and over 80 indirect customers, including some of the largest issuers of credit cards in the U.S. Impact of COVID-19 Pandemic The global outbreak of the COVID-19 pandemic continues to rapidly evolve.
Added
Please see the factors discussed elsewhere in this annual report on Form 10-K, including those discussed in “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for additional information. 51 Results of Operations Year Ended December 31, 2023 Compared with Year Ended December 31, 2022 The following table presents the Company’s results of operations for the periods indicated: Year Ended December 31, 2023 2022 $ Change % Change (in thousands) Net sales $ 390,629 $ 378,476 $ 12,153 3 % Cost of sales $ 181,547 $ 158,832 $ 22,715 14 % Gross profit 209,082 219,644 (10,562) (5 %) Operating expenses: Selling, general and administrative expenses 89,995 104,749 $ (14,754) (14 %) Income from operations 119,087 114,895 4,192 4 % Other income, net $ (2,011) $ 21,280 $ (23,291) (109 %) Income before income taxes 117,076 136,175 (19,099) (14 %) Income tax (expense) benefit (4,556) (4,360) (196) 4 % Net income 112,520 131,815 (19,295) (15 %) Net income attributable to redeemable non-controlling interests 93,281 113,158 (19,877) (18 %) Net income attributable to CompoSecure, Inc $ 19,239 $ 18,657 $ 582 3 % Year Ended December 31, 2023 2022 Gross Margin 54 % 58 % Operating margin 30 % 30 % Net Sales Year Ended December 31, 2023 2022 $ Change % Change (in thousands) Net sales by region Domestic $ 321,470 $ 295,423 $ 26,047 9 % International 69,159 83,053 (13,894) (17 %) Total $ 390,629 $ 378,476 $ 12,153 3 % The Company’s net sales for the year ended December 31, 2023 increased by $12.2 million, or 3%, to $390.6 million compared to $378.5 million for the year ended December 31, 2022.
Removed
In response to the COVID-19 pandemic, over the past several years, the Company has taken a number of measures to monitor and mitigate the effects of COVID-19, such as safety and health measures for the employees and securing the supply of materials that are essential to the Company’s production process.
Added
The increase was primarily driven by continued domestic growth in the Company’s premium payment card business, which was up 9%.
Removed
To date, the impact on the Company’s business and results of operations has not been significant. Any future impact of the pandemic on our operations will depend on future developments, which are uncertain and cannot be predicted and which could result in business disruption.The impact of COVID-19 has created uncertainty regarding the economic outlook for the near term.
Added
This was offset by lower international sales, which is a more variable market due to current global economic uncertainty, customer mix and a smaller sales base. 52 Domestic: The Company’s domestic net sales for the year ended December 31, 2023 increased $26.1 million, or 9%, to $321.5 million compared to $295.4 million for the year ended December 31, 2022.
Removed
While governments and central banks continued to be aggressive in providing fiscal and monetary stimulus, the global economic recovery remains fragile.
Added
This decrease was primarily due to current global economic uncertainty and international markets being a more variable market due to customer mix and a smaller sales base.
Removed
The Company has experienced an increase in its operating expenses as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities, and other administrative and professional services.
Added
The decrease in gross margin percentage was due to lower production efficiencies from new and innovative card constructions, as well as the impact of inflationary pressure on wages and materials for the year ended December 31, 2023.
Removed
Net income attributable to non-controlling interest for the year ended December 31, 2021 is equal to net income for the period from January 1, 2021 through December 31, 2021.
Added
Operating Expenses The Company’s prudent control on operating expenses led to a $14.7 million, or 14%, expense decrease for the year ended December 31, 2023 compared to the year ended December 31, 2022. Total operating expenses for the year ended December 31, 2023 were $90.0 million compared to $104.7 million for the year ended December 31, 2022.
Removed
Effective April 1, 2022, the Company had changed its methodology to apply its accounting policy to allocate the net income to redeemable non-controlling interest and CompoSecure, Inc. for the year ended December 31, 2021 and therefore the amounts previously reported have been adjusted to conform to the new methodology.
Added
There was an overall increase in other expenses due to the reduction in favorable changes to the fair value of mark-to-market instruments compared to December 31, 2022.
Removed
Year Ended December 31, 2022 2021 Gross Margin 58 % 54 % Operating margin 30 % 30 % Net Sales Year Ended December 31, 2022 2021 $ Change % Change (in thousands) Net sales by region Domestic $ 295,423 $ 218,441 $ 76,982 35 % International 83,053 49,507 33,546 68 % Total $ 378,476 $ 267,948 $ 110,528 41 % The Company’s net sales for the year ended December 31, 2022 increased by $110.5 million, or 41%, to $378.5 million compared to $267.9 million for the year ended December 31, 2021.
Added
The decrease in favorable changes in the fair value of mark-to-market instruments were primarily due to the increase in the price of the Company's Class A common stock compared to December 31, 2022. 53 Net Income The Company’s net income for the year ended December 31, 2023 was $112.5 million, compared to net income of $131.8 million for the year ended December 31, 2022.
Removed
The following table presents the Company’s net sales for the three months ended December 31, 2022 compared to September 30, 2022: Three Months Ended December 31, 2022 September 30, 2022 $ Change % Change (in thousands) Net Sales $ 93,790 $ 103,305 $ (9,515) (9 %) The Company’s net sales for the three months ended December 31, 2022 decreased $9.5 million, or 9%, to $93.8 million compared to $103.3 million for the three months ended September 30, 2022.
Added
The decrease was driven by the decrease in gross profit, changes to the fair value of warrant liabilities, earnout consideration liability and derivative liability, offset by the decrease in operating expenses.
Removed
The increase was primarily driven by higher sales volume, a more profitable sales mix, favorable change in fair value of earnout consideration liability of $23.3 million and favorable change in fair value of $18.9 million in warrant liability, partially offset primarily by increases in operating expenses as a result of higher sales volume and arbitration charges of $10.2 million.
Added
(2) Includes the changes in fair value of warrant liability, derivative liabilities and earnout consideration liability for the years ended December 31, 2023, December 31, 2022 and December 31, 2021.
Removed
Year Ended December 31, 2021 Compared with Year Ended December 31, 2020 The following table presents the Company’s results of operations for the periods indicated: Year Ended December 31, 2021 2020 $ Change % Change (in thousands) Net sales $ 267,948 $ 260,586 $ 7,362 3 % Cost of sales $ 123,099 $ 127,959 $ (4,860) (4 %) Gross profit 144,849 132,627 12,222 9 % Operating expenses: Selling, general and administrative expenses 63,424 48,669 14,755 30 % Income from operations 81,425 83,958 (2,533) (3 %) Other income (expense), net $ 1,132 $ (6,143) $ 7,275 (118 %) Income before income taxes 82,557 77,815 4,742 6 % Income tax benefit 857 — 857 100 % Net income 83,414 77,815 5,599 7 % Net income attributable to redeemable non-controlling interests 80,260 — 80,260 100 % Net income attributable to CompoSecure, Inc $ 3,154 $ 77,815 $ (74,661) (96 %) Year Ended December 31, 2021 2020 Gross Margin 54 % 51 % Operating margin 30 % 32 % Net Sales 51 Year Ended December 31, 2021 2020 $ Change % Change (in thousands) Net sales by region: Domestic $ 218,441 $ 213,982 $ 4,459 2 % International 49,507 46,604 2,903 6 % Total $ 267,948 $ 260,586 $ 7,362 3 % The Company’s net sales for the year ended December 31, 2021 increased by $7.4 million, or 3%, to $267.9 million compared to $260.6 million for the year ended December 31, 2020.
Added
Income Taxes Income taxes are applied to the income attributable to the controlling interest (see Note 9 in Notes to Consolidated Financial Statements in this Form 10-K) as the income attributable to the non-controlling interest is pass-through income.
Removed
This was due to higher growing demand for its products throughout the year ended December 31, 2021 as we continued to emerge from the adverse impact from the COVID-19 pandemic compared to the year ended December 31, 2020. The increase in net sales was due to a 2% increase in domestic sales and a 6% increase in international sales.

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Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Market Risk — interest-rate, FX, commodity exposure

7 edited+1 added−1 removed1 unchanged
Biggest changeAs of December 31, 2022, the Company had the following interest rate swap agreements (in thousands): Effective Dates Notional Amount Fixed Rate January 5, 2022 through December 5, 2023 $ 125,000 1.06 % December 5, 2023 through December 22, 2025 $ 125,000 1.90 % Under the terms of the interest rate swap agreement, the Company receives payments based on the greater of 1-month LIBOR rate or a minimum of 1.00%. 63 The Company has designated the interest rate swap as a cash flow hedge for accounting purposes that was determined to be effective.
Biggest changeAs of December 31, 2023, the Company had the following interest rate swap agreements (in thousands): Effective Dates Notional Amount Fixed Rate January 5, 2022 through December 5, 2023 $ 125,000 1.06 % December 5, 2023 through December 22, 2025 $ 125,000 1.90 % Under the terms of the interest rate swap agreement, the Company receives payments based on the greater of 1-month LIBOR rate or a minimum of 1.00%.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk In addition to existing cash balances and cash provided by operating activities, the Company uses variable rate debt to finance its operations. The Company is exposed to interest rate risk on these debt obligations and a related interest rate swap agreement.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk Interest Rate Risk 65 In addition to existing cash balances and cash provided by operating activities, the Company uses variable rate debt to finance its operations. The Company is exposed to interest rate risk on these debt obligations and a related interest rate swap agreement.
On February 28, 2023, the Company amended its credit facility to, among other things, transition from bearing interest based on LIBOR to SOFR or the Alternate Base Rate (as defined in the 2021 Credit Facility), at the election of the Company, plus an applicable margin.
On February 28, 2023, the Company amended the 2021 Credit Facility to, among other things, transition from bearing interest based on LIBOR to SOFR or the Alternate Base Rate (as defined in the 2021 Credit Facility), at the election of the Company, plus an applicable margin.
The Company reflects the unrealized changes in fair value of the interest rate swap at each reporting period in other comprehensive income and a derivative asset or liability is recognized at each reporting period in the Company’s financial statements.
The Company reflects the unrealized changes in fair value of the interest rate swap at each reporting period in other comprehensive income and a derivative asset or liability is recognized at each reporting period in the Company’s financial statements. 66
The Company performed a sensitivity analysis based on the principal amount of debt outstanding as of December 31, 2022, as well as the effect of its interest rate swap agreement. In this sensitivity analysis, the change in interest rates is assumed to be applicable for an entire year.
The Company performed a sensitivity analysis based on the principal amount of debt outstanding as of December 31, 2023, as well as the effect of its interest rate swap agreement. In this sensitivity analysis, the change in interest rates is assumed to be applicable for an entire year.
The Company determined the fair value of the interest rate swap to be zero at the inception of the agreement and $8.7 million at December 31, 2022. The Company reflects the realized gains and losses of the actual monthly settlement activity of the interest rate swap in its consolidated statements of operations.
The Company determined the fair value of the interest rate swap to be zero at the inception of the agreement and $5.3 million at December 31, 2023. The Company reflects the realized gains and losses of the actual monthly settlement activity of the interest rate swap in its consolidated statements of operations.
As of December 31, 2022, CompoSecure had $233.1 million in debt outstanding under the 2021 Credit Facility, all of which was variable rate debt and $130.0 million in long-term debt principal outstanding from the issuance of the Exchangeable Notes.
As of December 31, 2023, CompoSecure had $210.3 million in debt outstanding under the 2021 Credit Facility, all of which was variable rate debt and $130.0 million in long-term debt principal outstanding from the issuance of the Exchangeable Notes.
Removed
The Company expects that the existing swap will convert to SOFR at the same time as the secured credit facility converts. 64
Added
The existing swap converted to SOFR from LIBOR at the same time as the 2021 Credit Facility. The Company has designated the interest rate swap as a cash flow hedge for accounting purposes that was determined to be effective.

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